Empirical Studies on China's Write-Down Bonds

Abstract

The world economy continues to develop, prosperity and crisis coexist. The global financial crisis and the European debt crisis brought unstable factors to the world economy, and the security of global financial system was challenged. To cope with the crisis in the future, worldwide financial regulators urged the banks to establish emergency capital mechanism and enhance the ability to remove risks. Thus, the concept of contingent capital emerged as the times require, a variety of financial instruments with the quality of contingent capital were developed one after another. In 2013, the China Banking Regulatory Commission (CBRC) applied ideas of contingent capital in China. The CBRC added the “write down” or “convert to stocks” items into the secondary capital instruments, opened a new chapter of the issuance of write-down bonds in China. In this paper, we employ the data of China’s commercial banks and write-down bonds, empirically studied the influencing factors of the write-down bonds’ issuance and the effects of write-down bonds on commercial banks. The results show that the size of banks and Tier 1 capital adequacy ratio are the most significant influencing factors. The size is proportional to the absolute quantity of issued write-down bonds, inversely proportional to its relative quantity, and Tier 1 capital adequacy ratio is on the contrary. Also, we find that the quantity of issued write-down bonds is proportional to issuing bank’s Tier 1 capital adequacy ratio, inversely proportional to its Tier 2 capital ratio and so on. We systematically studied the relationships between the write-down bonds and the capital, assets of commercial banks in China.