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Chinese write-down bonds and bank capital structure

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  • Ping Li
  • Hui Meng
  • Feihui Yu

Abstract

In this paper, we use a structural model to investigate a bank capital structure that contains deposits, straight bonds, Write-Down (WD) bonds and equity. We first explicitly give the default boundaries and the values of a deposit, straight bond, WD bond, equity and bank asset, and then use a numerical example to demonstrate the relations among leverage, deposits, WD bonds and bank value. Our results show that value-maximizing banks select the ratio of deposit, straight bond and WD debt so that endogenous default is consistent with exogenous bank closure. The bank increases its leverage by swapping both deposits and straight bonds for WD bonds. And the issuance of WD bonds not only reduces the expected bankruptcy loss and credit spread of straight bonds, but also improves the bank value. This indicates that WD bonds do help to stabilize banks. We also study the role of deposit insurance and the Chinese Financial Stability Bureau (FSB), and give a closed-form expression for the fair insurance premium. Lastly, to check the robustness of our results, we do the sensitivity analysis and investigate the effect of three sets of exogenous parameters on bank capital structure: WD parameters, bank business features, closure rules and insurance subsidy, and obtain some practically significant implications.

Suggested Citation

  • Ping Li & Hui Meng & Feihui Yu, 2018. "Chinese write-down bonds and bank capital structure," Quantitative Finance, Taylor & Francis Journals, vol. 18(9), pages 1543-1558, September.
  • Handle: RePEc:taf:quantf:v:18:y:2018:i:9:p:1543-1558
    DOI: 10.1080/14697688.2018.1444559
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    Cited by:

    1. Li, Ping & Guo, Yanhong & Meng, Hui, 2022. "The default contagion of contingent convertible bonds in financial network," The North American Journal of Economics and Finance, Elsevier, vol. 60(C).
    2. LI, Fangfang & LI, Ping, 2021. "Dynamic correlations and spillover effects between CoCo bonds and other financial assets: Evidence from European banking," Finance Research Letters, Elsevier, vol. 38(C).
    3. Philippe Oster, 2020. "Contingent Convertible bond literature review: making everything and nothing possible?," Journal of Banking Regulation, Palgrave Macmillan, vol. 21(4), pages 343-381, December.
    4. Zhao, Zhiming & Li, Shasha & Tang, Huiling, 2021. "Write-down bonds, credit risk and imperfect information," The North American Journal of Economics and Finance, Elsevier, vol. 57(C).
    5. Mengting Fan & Zan Mo & Huijian Fu & Tsung-Hsien Wu & Zili Chen & Yue He, 2024. "Does climate policy uncertainty matter for bank value?," Economic Change and Restructuring, Springer, vol. 57(2), pages 1-28, April.

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