Do contingent convertible bonds reduce systemic risk?

Abstract

In this paper, we implement an empirical analysis to discuss the impact of CoCo bond issuance on the systemic risk using three systemic risk measures for banks: SRISK, SES and ΔCoVaR. Our results show that issuing CoCo bonds the first time decreases systemic risk as a positive response to a future crisis. However, the second issuance increases the systemic risk, possibly by demonstrating a higher risk of financial distress or capital needs. Moreover, we provide evidence that smaller banks, banks with larger loans ratios to their total assets, and banks with unstable sources of funding are more benefited by CoCo issuance. We also perform robustness checks for all the findings and discuss policy implications.