Contingent Convertibles: Inkludering af CoCos i bankers kapitalstruktur

Søren Kjersgaard Thagesen

Student thesis: Master thesis

Abstract

This thesis focuses on Contingent Convertibles (’CoCos’) and their impact on banks, by developing a model which includes CoCos as a part of the capital structure of a financial institution. The main objectives of the thesis are the following; to give a thorough description of CoCos. To develop, implement and validate a model which includes CoCos as a part of a bank’s capital structure. And to use this model, to analyse how CoCos affect the issuing bank in an empirical study. In short, CoCos are bonds with a principal that can be either converted to equity or written down, when the capital-level of the issuing bank falls below a certain level. This allows the issuing bank to reduce its liabilities when it is in some form of distress, which should reduce the risk of default, and could also lower the need for government interference, as some of the losses in a potential default are taken by CoCo-investors instead. In all, CoCos are thus meant to enhance financial stability. The model follows the one proposed by Chen et al. (2013), a jump-diffusion model of a firm’s income and asset value. The capital structure consists of deposits, senior and junior debt, CoCos and equity, and gives explicit formulas to price the market value for all parts of the capital structure, and a way to estimate the default barrier. Using this model to price the market values of equity and CoCos for Deutsche Bank, as well as estimating the default barrier, this thesis finds that pricing through the model generally matches the observed market prices. Analysing Deutsche Bank’s CoCos, this thesis finds that an increased amount of CoCo-debt could result in both higher market value of equity and reduced CDS-spread in terms of a lower default barrier for Deutsche Bank.

EducationsMSc in Mathematics , (Graduate Programme) Final Thesis
LanguageEnglish
Publication date2018
Number of pages86
SupervisorsMads Stenbo Nielsen