- Friday 1 March 2019
- Dr Mahmoud Fatouh; Bank of England
Dr Fatouh's paper presents a model of shareholders’ willingness to exert effort to reduce the likelihood of bank distress, and the implications in the presence of CoCo bonds. Consistent with the existing literature, we show that the direction of the wealth transfer at the conversion of CoCo bonds determines their impact on shareholder risk-taking incentives. We also find that the benefits of anytime CoCos are likely to be small, and that quality of capital limits can reduce the risk-taking incentives of shareholders. Finally, our analysis suggests that regulators can use the CoCo bonds conversion rate to change the risk-taking incentives of shareholders.