Many banks contributed through their high-risk business models to the financial crisis in 2007. The financial crisis has shown that for a bank's solvency it is not only the amount of equity that is important, but also significantly the quality of equity. In particular hybrid capital was not used to a sufficient extent to absorb losses, although it is partially core capital under Basel II. Because of this the Basel Committee on Banking Supervision decided in December 2010 on new capital- and liquidity rules for banks (''Basel III framework''). The Basel III framework implemented the regulatory requirements to strengthen the financial system. In particular the qualitative requirements were raised for core capital. Under these new regulations core capital is crucial, because it can fully and immediately be claimed for losses. The old forms of hybrid capital will be recognized in regulatory capital to a lesser extent in the future. This has implications especially for subordinated bonds. The aim is to involve subordinated creditors and equity investors in the recovery phase in the cost of crisis management. The new capital requirements mean major structural changes for the banks, because the comparatively cheap hybrid capital must be replaced by capital of higher quality.
A new form of hybrid capital have emerged, so called contingent convertible bonds(CoCos), a fixed-income security which is a capital buffer for a bank in financial distress and so could be attributed to regulatory equity capital. This hybrid capital is in the form of a mandatory convertible bond, which can contribute to making up for losses such as equity in the event of a crisis. In order to meet the new regulatory requirements, many banks are considering the advantages of CoCos.
Therefore this thesis attempts to answer the question of how CoCos differ from
convertible bonds, and how these instruments are suitable for contributing as core capital under Basel III. The place ability of CoCos and the challenges resulting from their use are discussed in this thesis. Based on the different design options for a coco bond, the most sensible will be determined and put into practice. So far it is a mainly theoretical issue with little empirical evidence, so the thesis will explain and evaluate the various theoretical aspects. Overall a comprehensive picture of the impacts resulting
from the new capital definition will be created.
Inhaltsverzeichnis (Table of Contents)
- Introduction
- Basel III
- History
- Implementation and objectives of Basel III
- Common equity capital (Core Tier 1)
- Additional core capital (Additional Tier 1)
- Supplementary capital (Tier 2)
- Additional capital buffer
- Risk coverage
- Leverage ratio
- Liquidity requirements
- Comparison of the capital definition of Basel II and Basel III
- Critical consideration of Basel III
- Hybrid capital
- The market for hybrid capital
- Silent partnership
- Participatory notes
- Subordinated liabilities
- Trust preferred securities
- Convertible- and warrant bonds
- Contingent capital
- Contingent convertible bonds
- Critical assessment of the suitability as a component of core capital
- The market for contingent convertible bonds
- The features of contingent convertible bonds
- The Trigger
- Conversion Ratio
- The Term
- Factors impacting on pricing
- Optimal design of contingent convertible bonds
- From the perspective of regulators
- From the perspective of shareholders
- From the perspective of investors
- Impact of Basel III
- Impact on banks funding structure
- Impact on banks hybrid capital
- Impact on convertible bonds
- Impact on contingent convertible bonds
- Impact on Commerzbank AG
Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)
This thesis aims to analyze the impact of Basel III on convertible bonds, with a specific focus on contingent convertible bonds (CoCos). It examines how CoCos differ from traditional convertible bonds and assesses their suitability as a component of core capital under the Basel III framework.
- The role of banks in the global economy and the financial crisis of 2007
- The evolution and objectives of Basel III capital requirements
- The characteristics and suitability of CoCos as a form of hybrid capital
- The impact of Basel III on banks' funding structures and hybrid capital
- The challenges and opportunities associated with the integration of CoCos into the regulatory framework
Zusammenfassung der Kapitel (Chapter Summaries)
The introductory chapter provides context for the thesis, discussing the financial crisis of 2007 and the role of banks in the global economy. It highlights the importance of capital adequacy for bank solvency and the need for regulatory reforms to address the weaknesses exposed by the crisis.
Chapter two provides a comprehensive overview of Basel III, covering its historical context, implementation, and objectives. It outlines the different tiers of capital, including common equity capital, additional core capital, supplementary capital, and the additional capital buffer. The chapter also discusses risk coverage, leverage ratio, liquidity requirements, and compares the capital definitions of Basel II and Basel III.
Chapter three explores the concept of hybrid capital and examines various forms, including silent partnerships, participatory notes, subordinated liabilities, trust preferred securities, and convertible bonds. It highlights the role of hybrid capital in absorbing losses and providing a cushion for banks.
Chapter four delves into the specific area of contingent capital, with a particular focus on contingent convertible bonds (CoCos). It provides a critical assessment of their suitability as a component of core capital and examines the market for CoCos. The chapter then discusses the features of CoCos, including the trigger mechanism, conversion ratio, term, and factors influencing pricing.
Chapter five explores the impact of Basel III on banks' funding structures and hybrid capital, specifically analyzing the impact on convertible bonds and contingent convertible bonds. It concludes with a case study of Commerzbank AG to illustrate the practical implications of Basel III.
Schlüsselwörter (Keywords)
This thesis focuses on key topics such as Basel III, hybrid capital, contingent convertible bonds (CoCos), bank capital adequacy, financial regulation, and the impact of regulatory changes on bank funding structures. The work also considers the role of different stakeholders, including regulators, shareholders, and investors, in the design and implementation of CoCos.
- Citar trabajo
- Timo Köffer (Autor), 2013, The impact of Basel III on convertible bonds – with particular emphasis on contingent convertible bonds., Múnich, GRIN Verlag, https://www.grin.com/document/263424
