Hori, Kenjiro and Martin Cerón, Jorge (2017) Indifference curve analysis of banks' risk-taking and CoCo Covenants. Working Paper. Birkbeck, University of London, London, UK. (Unpublished)
|
Text
OptimalVol_2.pdf - Published Version of Record Download (471kB) | Preview |
Abstract
This paper investigates two repercussions of the contingent convertible (CoCo) bond bail-in framework: the agency costs and the resulting monitoring costs. For the first, the equityholders' behaviour is analysed as a trade-off between the value of the bank and the risk taken by using an indifference curve model. While the first-best optimal risk maximises the value of the bank, the equityholders select sub-optimally high risk level under bail-in structures. This leads to both wealth transfer and value destruction agency costs. For the second, the increased required rate of return by bondholders that reflects the cost of monitoring is shown to act as a "Pigouvian tax" on the equityholders' behaviour. Utilising this, we propose different types of covenants within CoCo bonds indenture as a solution to the sub-optimal risk-taking behaviour.
Metadata
| Item Type: | Monograph (Working Paper) |
|---|---|
| School: | Birkbeck Faculties and Schools > Faculty of Business and Law > Birkbeck Business School |
| Depositing User: | Ken Hori |
| Date Deposited: | 06 Dec 2018 15:14 |
| Last Modified: | 02 Aug 2023 17:46 |
| URI: | https://eprints.bbk.ac.uk/id/eprint/25372 |
Statistics
Additional statistics are available via IRStats2.
Archive Staff Only (login required)
