Removing moral hazard and agency costs in banks: beyond CoCo Bonds
Hori, Kenjiro 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 Faculties and Schools > Faculty of Business and Law > Birkbeck Business School |
| Depositing User: | Administrator |
| Date Deposited: | 20 May 2016 08:34 |
| Last Modified: | 02 Aug 2023 17:23 |
| URI: | https://eprints.bbk.ac.uk/id/eprint/15261 |
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