6th February 2015 at 12:00, Room : To be confirmed
ESCP EUROPE, 79 avenue de la République 75011 Paris
Professor Jean-Charles Rochet, University of Zurich
Will present the paper:
“How to finance SIFIs?”
Abstract: We investigate how Systematically Important Financial Institutions (SIFIs) should be financed. The main specificity of such firms is that they cannot be closed down without provoking negative externalities on the financial system and more broadly on the whole economy. Since shareholders do not internalize these externalities, they provide less capital than what would be socially optimal, generating too many failures. We explore different bail-in mechanisms that have been proposed to limit the frequency of costly government interventions. We show that in the absence of tax subsidies to debt instruments, coco bonds are inferior to contingent capital contracts. Coco bonds are a simple means of increasing the resilience of SIFIs while providing large tax benefits to banks’ shareholders. We show that when tax revenues are properly accounted for, these coco bonds are detrimental to social welfare.
Organizers: Prof. Gunther Capelle-Blancard (Université Paris I Panthéon-Sorbonne, Labex Refi), Prof. Christophe Moussu (ESCP Europe, Labex Refi), Arthur Petit-Romec (ESCP Europe, Labex Refi)