SciELO - Scientific Electronic Library Online

 
vol.20 issue1An assessment of consumers' subconscious responses to frontline employees' attractiveness in a service failure and recovery situationA proposed best practice model validation framework for banks author indexsubject indexarticles search
Home Pagealphabetic serial listing  

Services on Demand

Article

Indicators

Related links

  • On index processCited by Google
  • On index processSimilars in Google

Share


South African Journal of Economic and Management Sciences

On-line version ISSN 2222-3436
Print version ISSN 1015-8812

Abstract

LIEBENBERG, Francois; VAN VUUREN, Gary  and  HEYMANS, Andre. Contingent convertible bonds as countercyclical capital measures. S. Afr. j. econ. manag. sci. [online]. 2017, vol.20, n.1, pp.1-17. ISSN 2222-3436.  http://dx.doi.org/10.4102/sajems.v20i1.1600.

BACKGROUND: The procyclical nature of capital models under the Basel II Accord has been widely criticised for exacerbating lending in economic expansions and restricting lending during economic contractions. These criticisms have led regulators to employ countercyclical measures in subsequent Basel accords. One of these measures, the countercyclical capital buffer (CCB), has been proposed as an effective countercyclical measure in expansionary periods as a deterrent to excessive lending through increased bank capital requirements. AIM: The effectiveness of the CCB during contractions is not obvious. Contingent convertible (CoCo) bonds - which are bond-like until triggered by a deterioration of a prescribed capital metric, at which point they convert into a form of equity - are explored as a supplementary countercyclical capital measure for such periods to establish whether or not they function effectively. SETTING: The analysis is undertaken using global bank CoCo data, and then applied to South African banks. METHODS: The Hodrick Prescott filter was applied to empirical historical data. RESULTS: The CCB functions as a good countercyclical capital measure in times of economic expansion by absorbing losses and stabilising the capital base through equity issuance. CONCLUSION: The issuance of CoCo bonds - if their trigger mechanisms are designed correctly - may prove helpful to banks and the broader financial sector in times of economic contraction through the countercyclical capital properties that manifest through CoCo bonds under these economic conditions.

        · text in English     · English ( pdf )

 

Creative Commons License All the contents of this journal, except where otherwise noted, is licensed under a Creative Commons Attribution License