Congratulations to PhD student Stephanie Chan who won the best paper award for young academics at the 2016 European Capital Markets Institute (ECMI) Annual Conference, held November 9, 2016 at the National Bank of Belgium for her paper “Contingent convertible instruments(CoCos): Design, Risk Shifting Incentives and Financial Fragility” (TI Discussion Paper, 16-007/VI, co-authored with fellow Sweder van Wijnbergen).
In this paper the authors indicate that if the conversion leads to a wealth transfer from CoCos holders to equity holders, it gives rise to undesirable risk – shifting by banks. Moreover, the incentives for risk – shifting increase as the financial environment becomes more fragile. Therefore, CoCos may encourage, instead of mitigate, the creation of a financial crisis. In order to sidestep these consequences, their use by banks must be tempered by increasing capital requirements, and as such, they cannot be treated as true substitutes for equity.
ECMI organised a call for papers before the conference, which culminated in the award of two prizes to young academics, selected from a large set of submissions. Beside Stephanie, Yannick Timmer (Trinity College Dublin, Ireland) was awarded for his paper “Cyclical Investment Behaviour across Financial Institutions”. Read more here.