郭桂霞等，Endogenous Risk-Taking，工作论文

Abstract

In a two-period model with a bank investing in a risky asset financed with deposit,equity, as well subordinated debt or contingent capital, the bank’s risk-taking decisionis endogenously examined. Contrary to the studies claiming that compared with issuing subordinate debt, contingent capital either mitigates or aggravates the riskshifting problem, it is found that this crucially hinges on various factors, including its capital structure, the distribution of macro-economic uncertainties, trigger level,conversion ratio, bankruptcy cost, as well as punishment of non-fulfilling the minimum capital ratio threshold. Issuing CoCos helps mitigate the risk-shifting problem of highly-leveraged banks, but lowly-leveraged ones may even take more risk when external and internal disciplines are not stringent enough and the uncertainties are non-monotonically distributed so that good times are not “tail events”. Therefore, if exogenously examined, it may undervalue or overvalue the effect of issuing contingent capital on mitigating banks’ risk-shifting incentives.

 

Keywords: Endogenous Risk Taking; Contingent Capital; Tail Events