Research

Publication

"The Necessary Evil: Non-dilutive CoCo Bonds?" joint with Andrea Gamba and Kebin Ma, Review of Corporate Finance Studies, forthcoming

Abstract: Banks predominantly issue non-dilutive CoCos, contrary to the suggestion that CoCos should be dilutive to reduce risk-taking. In an agency model of two moral hazards, we show that although dilutive CoCos deter ex-ante risk-taking and prevent banks from being undercapitalized, penalizing shareholders of a distressed bank with dilution leads to ex-post risk-shifting. CoCos' design and risk implications depend on bank capitalization: equity-constrained banks prefer non-dilutive CoCos because they maximize the financing capacity by tackling only the ex-post risk-shifting. Non-dilutive CoCos can implement the constrained social optimum for highly leveraged banks, and regulators can induce appropriate CoCo designs with capital regulations.

Work in Progress

"Contingent Convertibles and Risk Management: Evidence from G-SIB Lending Practices"

Analysing loan data, we assess the effect of G-SIBs' first CoCo bond issuances on their risk appetite in the syndicated loan market, contrasting with U.S. and Canadian G-SIBs as a control group, where CoCos are not counted as AT1 capital post-Basel III. We observe that CoCo issuers exhibit increased loan spreads and a downturn in lending volumes versus their North American counterparts. The effect is less pronounced in banks with substantial Tier 1 capital, suggesting that recognising CoCos as AT1 capital has the potential to instil more conservative lending practices, particularly in undercapitalised banks, contributing to a more robust financial system.

"Demandable Deposit Contracts in Debt Commitment" joint with Andrea Gamba

Our discrete-time dynamic model examines how bankers exploit legacy deposits, aiming for a steady increase in leverage, while depositors can discipline these decisions by potentially withdrawing funds in response to debt dilution. The model highlights a strategic interaction where depositors must solve an optimization problem, deciding on withdrawal rates after bankers' cash flows are realised. Depositors weigh the disciplinary power of demandable deposits against the threat of bank runs, which could trigger bankruptcy costs and diminish their recovery. Anticipating potential debt dilution from bankers' leverage strategies, depositors may preemptively escalate withdrawals, leading to bank runs.

"The role of CoCos in financial conglomerates" 

CoCo bonds account for most of the incremental value of Tier 1 capital in G-SIBs. They are issued in BHCs and their banking subsidiaries. The paper is inspired by this empirical observation and explains the prevalence of CoCo at the subsidiary level. This study emphasises the role of CoCos in managing the cost of risk contamination while facilitating risk sharing among different entities within financial conglomerates.