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The influence of Contingent Convertible Bond issuance on Banks’ risk taking

Januchowski, Bryan

(2019)

Details

Supervisors

Grégoire, Philippe

Faculty

Louvain School of Management

Degree label

Master [120] en sciences de gestion

Abstract

This master’s thesis investigates the influence of contingent convertible bonds (CoCo-Bonds) on banks’ risk taking. The theoretical part presents holistically CoCo-Bonds. It first introduces potential implications of this financial instrument, particularly CoCo-Bonds’ potential impact on banks’ risk taking. Subsequently, different design features of CoCo-Bonds are presented, focusing on the trigger event and the loss absorption mechanism. CoCo-Bonds especially influence banks’ risk taking if they are designed with a high trigger level and a conversion to equity loss absorption mechanism containing a fixed dollar discount conversion rate. Additionally, the regulatory consideration of CoCo-Bonds and related theoretical and empirical literature is presented. Overall, scholars come to different conclusions regarding CoCo-Bonds’ impact on banks’ risk taking. However, several articles demonstrate that this financial instrument has an impact on managements’ risk choice. To provide a further point of view, the last chapter of the theoretical part presents insights from an interview with Commerzbank AG. The empirical part of this master’s thesis investigates CoCo-Bonds’ influence on banks’ risk taking. Furthermore, the impacts of specific characteristics of this financial instrument are explored. The empirical part is based on data collected manually from Bloomberg. The statistical analysis is conducted in STATA. Hypotheses as well as the variable selection are based on previous academic literature. After a presentation of the selection of the appropriate statistical methods, panel data regression analyses are employed. To verify the results, several robustness tests are conducted. Lastly, one chapter is dedicated to the description of limitations of this master’s thesis and to an explanation of potential future research. The main result of this master’s thesis is that CoCo-Bond issuances have a significant negative impact on banks’ risk taking. Additionally, CoCo-Bonds designed with a conversion to equity loss absorption mechanism also significantly influence banks’ risk taking negatively. However, no significant effect is found in case of write-down CoCo-Bonds. Finally, also the effect of high trigger levels is insignificant.