Bank Capital Structure with Contingent Capital: Empirical Evidence

We analyze the capital structure of banks within the European Economic Area (EEA) consisting of tier 1 contingent capital bonds (CoCos). We find that highly levered banks were more likely to issue CoCos and conditional on having issued CoCos levered banks had higher portion of CoCos in their capital structure. We also find that less risky banks were more likely to issue CoCos. The effect of bank riskiness on the fraction of CoCos in the capital structure is strongest for levered banks. We interpret these results as the response of constrained banks trying to optimize their return on equity (ROE) using CoCos.