Contingent Convertible Capital Instruments and Bank Stability

Ing. Vlad Morosan

Master's thesis

Abstract:

This thesis examines the effects associated with the issuance of contingent convertible capital instruments (CoCos) on banks’ financial stability. For this purpose, we have conducted an event study to investigate the announcement effect of the CoCo bonds issuance on two market-based financial soundness indicators: stock returns and credit default swap (CDS) spreads. The thesis is divided into three chapters. Chapter I provides an introduction to the concept of financial stability and risk management as vital factors for strong and resilient financial institutions. Chapter II provides theoretical background of contingent convertible instruments in the light of recent developments in regulatory landscape, explaining the main elements of CoCos, such as conversion mechanism and trigger. Chapter III introduces the dataset, methodology used in the event study, and an overview of corresponding empirical results. Our findings indicate that the market has a systemic reaction to the announcement of contingent convertible instruments and that both the shareholders and the bondholders value the decreased default probability and reduced risk incentives of the institution issuing contingent convertible instruments.

Keywords

Contingent convertible instruments, CoCos, event study, bank stability

Language used: English

Date on which the thesis was submitted / produced: 17. 5. 2016

Thesis defence

• Date of defence: 20. 6. 2016
• Supervisor: Oleg Deev
• Reader: Ing. Luděk Benada, Ph.D.

Masaryk University

Faculty of Economics and Administration

Master programme / field:
Finance and Accounting / Finance (eng.)