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CoCo Bonds, Bank Stability, and Earnings Opacity

Author

Listed:
  • Ludolph, Melina
Abstract
This paper examines the effect of CoCo bonds that qualify as additional tier 1 capital on bank stability and reporting. The results reveal a significant reduction in the distance to insolvency following the hybrid bond issuance due to increased earnings volatility. Banks report less stable net income due to more volatile loss provisions, which increases earnings opacity rather than reflects changes in asset quality. The findings are consistent with the premise that persistent uncertainty and misconceptions among investors about bail-in likelihoods limit their monitoring engagement, which results in banks becoming less transparent.

Suggested Citation

  • Ludolph, Melina, 2024. "CoCo Bonds, Bank Stability, and Earnings Opacity," IWH Discussion Papers 1/2022, Halle Institute for Economic Research (IWH), revised 2024.
    • Handle: RePEc:zbw:iwhdps:12022
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    File URL: https://www.econstor.eu/bitstream/10419/305189/1/iwh-dp2022-01rev2.pdf
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    More about this item

    Keywords

    AT1 capital; bank stability; Basel III; CoCo bonds; earnings opacity;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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