Increasing Profitability Through Contingent Convertible Capital: Empirical Evidence From European Banks
39 Pages Posted: 24 Sep 2018 Last revised: 6 Dec 2018
Date Written: September 6, 2018
The purpose of this paper is to conduct an empirical analysis of the use of contingent convertible capital as additional tier 1-capital (CoCo-AT1-capital) and its determinants and to study its implications for bank profitability. I analyse a panel dataset of 231 banks from EEA-countries as well as Switzerland from 2014 to 2017. The determinants analysis is based on a unique dataset of capital components to examine determinants of CoCo-AT1-capital on a level basis. It reveals that the use of CoCo-AT1-capital is significantly driven by earnings, loan loss provisions, and the business model of banks. Regarding the consequences for profitability, I am the first to analyse the implications of CoCo-AT1-capital usage on bank profitability. Empirical analysis yields that using CoCo-AT1-capital significantly increases bank profitability, measured as Return on Assets and Return on Risk-weighted Assets. However, the elevated profitability cannot undoubtedly be attributed to the tax shield of CoCo-AT1-capital alone, but most reasonably be explained by inherent value adding incentive effects. Anyway, banks are well-advised to exploit the benefits of CoCo-AT1-capital.
Keywords: CoCo-Bonds, Contingent Capital, Capital Regulation, Bank Profitability, Capital Structure
JEL Classification: G21, G28, G32
Suggested Citation: Suggested Citation