Abstract
We analyze the optimal capital structure of a bank issuing countercyclical contingent capital, i.e., notes to be converted in common shares in case of a bad state for the economy. This type of asset reduces the spread of straight debt but is quite expensive. The effect on bankruptcy costs is limited (it is strong when contingent capital is not countercyclical), the asset reduces the asset substitution incentive. Contingent capital is useful for macroprudential regulation, the countercyclical feature is important depending on priorities (moderate the asset substitution incentive or reduce bankruptcy costs).
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
