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    Removing moral hazard and agency costs in banks: beyond CoCo Bonds

    Hori, Ken and Ceron, George Martin (2016) Removing moral hazard and agency costs in banks: beyond CoCo Bonds. Working Paper. Birkbeck College, University of London, London, UK.

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    Abstract

    The convex payoffs for equityholders in a corporate structure results in agency costs and moral hazard problems. The implicit government guarantee for banks accentuates these. We believe that the Basel III related bail-in contingent convertible (CoCo) structures do only not solve these problems, but may even aggravate them. In this paper we suggest solutions. The first is to replace the currently issued writedown/off and equity-conversion CoCo structures with a market-price equity-conversion CoCo bonds. This mirrors the full dilution effect of an ordinary equity raise in a distressed situation to reduce incentives for high risk-taking by equityholders. The second is to establish a Contingent Equity Base that replaces the incumbent shareholders once the CoCo is triggered. This will finally remove the perverse risk-taking incentives. The valuation of the CEB is then suggested.

    Metadata

    Item Type: Monograph (Working Paper)
    Additional Information: ISSN 1745-8587: BWPEF 1603
    Keyword(s) / Subject(s): CoCo bond, agency costs, moral hazard, bail-in, cost of equity
    School: Birkbeck Schools and Departments > School of Business, Economics & Informatics > Economics, Mathematics and Statistics
    Depositing User: Administrator
    Date Deposited: 20 May 2016 08:34
    Last Modified: 20 May 2016 08:47
    URI: http://eprints.bbk.ac.uk/id/eprint/15261

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