This paper aims to present a model of shareholders’ willingness to exert effort to reduce the likelihood of bank distress and the implications of the presence of contingent convertible (CoCo) bonds in the liabilities structure of a bank.
This study presents a basic model about the moral hazard surrounding shareholders willingness to exert effort that increases the likelihood of a bank’s success. This study uses a one-shot game and so do not capture the effects of repeated interactions.
Consistent with the existing literature, this study shows that the direction of the wealth transfer at the conversion of CoCo bonds determines their impact on shareholder risk-taking incentives. This study also finds that “anytime” CoCos (CoCo bonds trigger-able anytime at the discretion of managers) have a minor advantage over regular CoCo bonds, and that quality of capital requirements can reduce the risk-taking incentives of shareholders.
This study argues that shareholders can also use manager-specific CoCo bonds to reduce the riskiness of the bank activities. The issuance of such bonds can increase the resilience of individual banks and the whole banking system. Regulators can use restrictions on conversion rates and/or requirements on the quality of capital to address the impact of CoCo bonds issuance on risk-taking incentives.
To model the risk-taking incentives, authors generally modify the asset processes to introduce components that reflect asymmetric information between CoCo holders and shareholders and/or managers. This paper follows a simpler method similar to that of Holmström and Tirole (1998).
The trust figure has undergone interesting developments in South African law during the last century. Due to its flexibility and multi-functionality it has developed as the legal institution of choice for many holistic business structures: from estate-planning and risk-protection, to financial-instrument entity. Particular financial innovations, such as securitization, required regulators to come up with fresh solutions within existing legal and regulatory systems. The traditional role of the inter vivos trust as a family wealth-transfer device became rather trivial as the importance of the financial and corporate roles of trusts increased. Trusts are not only prevalent in securitization and other investment roles, but also fulfil an increasingly important role in organizational law, which includes a variety of business-legal fields. The evolutionary process of the trust as collective investment-scheme vehicle to that of a legal entity in structured-finance programmes,such as a special purpose instrument, matured without any resistance in South Africa. It is submitted that, in the trust-development process, South Africa should not necessarily find its inspiration solely in developed nations, but should rather position itself in its real context of a developing Southern African democracy, with the potential of becoming an important financial innovator in a world of economic turmoil.It is submitted that a sound legal and regulatory framework for the application of trusts in the financial sphere is crucial. International best practice requires a definite and effective regulatory environment for economic expediency. It is submitted that a hybrid system, as found in South Africa, is better suited to adapt to the challenges of an ever-changing legal and economic reality. It is submitted that legislative interventions should be limited to the bare minimum and a holistic approach should be adopted, including the ratification of The HagueConvention on Trusts and some focused soft-law interventions.
Purpose: This article tests own credit risk accounting under Modigliani-Miller theory to determine whether there is a fundamental fallacy in the unsolved issue of counter-intuitive results.
Design/methodology/approach: A system of equations derived from the MM theorem to own risk.
Findings: Solutions to the wealth transfer hypothesis. Parameters of issuer and holder that nullify own credit risk gain/loss and impairment loss/gain. A theoretical framework is developed to reconcile accounting to Modigliani-Miller theory. If the MM theory is true, as generally it is held to be, the system of equations shows that the recognition of own credit gain or loss would arise from different accounting measurement bases of liability own risk versus assets impairment, and by not reflecting the rebound effect in liability fair value measurement, in both cases not a faithfully representation of the substance of the facts and circumstances. The former would require a re-alignment between impairment and financial liability measurement rules. The latter would require a rethinking of fulfillment vs. fair value measurement to these liabilities. In addition, given the tenet that the accounting does not recognize shareholder wealth transfer, the current financial performance dilemma can be solved by recognizing in equity the concept of capital maintenance adjustment.
Originality: Rare, if not unique, innovative direct application of MM paradigm to own risk.
Implications: Significant contribution to the debate on performance and OCI, counter-intuitive results and accounting mismatch, fulfilment value versus fair value, incomplete recognition of contemporaneous asset value, and the definition of income in the Conceptual Framework.
It is undeniable that sustainability has become one of the hottest discussion subjects nowadays. From a broad perspective, the ramifications of sustainability reach almost all of the social, political and economic territories. However, on many occasions, the lightness and superficiality with which the terms related to this matter are handled, make us think that it could be just a temporary fashion. We must not confuse ourselves. The truth is that we are witnessing profound changes in the socio-economic system that unveil a paradigm shift. If we set sustainability aside for a second, and we look from a pure socio-economic perspective, it becomes obvious that we are in the middle of an intergenerational wealth transfer of approximately 30 trillion dollars from the so-called baby boomers to their successors. And these successors - not just millennials, but people in their 30s to 40s - simply think about their economic decisions differently. Consequently, institutional investors have changed gears in their economic vision as well.It is the end of finance as it was. The consideration of ESG (Environmental, Social and Governance) factors into economic decisions represent not just a fashion but a new reality. A reality that represents a sizable challenge that, in many ways, comes along with plenty of controversy. In practice, it means the consideration of environmental, social and governance factors along with financial factors in the economic decision-making process. And this is a fundamental change for the financial and capital management world. The new paradigm confronts two main forces that can adopt different names, denominations or justifications: sustainability vs profitability, ESG vs financial performance, environment vs profit, etc. In sum, many economic operators may think that ESG factors could compromise financial performance. Is this reflection true or is it just an excuse for those anchored in certain patterns? This analysis will deep dive into the rational behind the current changes in the finance and capital markets to align its structures and business models to the new sustainable economy.10 keys explain the importance of sustainability in today’s finance world. These 10 macro trends are behind a profound transformation movement in the financial market setting up a new pace and new business patterns. It is the end of finance as it was.
Many low-income households in rich countries have very little wealth, but the role of intergenerational wealth transmission in underpinning this deficit is not known. This paper seeks to fill that gap by investigating patterns of past wealth transfer receipt for low-income versus other households in seven rich countries and assessing the contribution that these transfers, or their absence, make to current wealth levels. We find that households on low incomes are relatively disadvantaged in terms of intergenerational transfers received in the past, both in terms of the likelihood of having received any and the amounts received by those who do benefit from such transfers. The role that this disadvantage plays in the linkage between current low income and low wealth is assessed and evidence presented that it is significant. Simulation of a universal wealth transfer scheme or ‘capital endowment’ on reaching adulthood for two countries shows that such a policy could lead to a marked decline in the proportion of low-income adults with no wealth. This and alternative or complementary policy responses to these wealth deficits merit the most serious attention. (Stone Center on Socio-Economic Inequality Working Paper)
PurposeThe authors analyse how the receipt of a wealth transfer (inheritance or gift) affects labour force participation in 14 EU countries. They compare the effect of receiving an inheritance or a gift and investigate different behaviours at the gender level and educational level and for elderly individuals.Design/methodology/approachThe authors use data from the Household Finance and Consumption Survey for 14 European countries and adopt an instrumental variable approach. They use information on the type of donor (family and nonfamily) to infer the degree of anticipation of a wealth transfer.FindingsThe authors find that unexpected wealth transfers have a negative impact on labour force participation, with a stronger impact for gifts than for inheritances. For gender, they find larger negative impacts for females than for males, which is in line with a weaker attachment to the labour market. Receiving an unexpected wealth transfer may also result in early retirement.Originality/valueThe paper offers a novel comparison of the effect of receiving an inheritance or a gift on labour force participation using a unique European dataset. The authors investigate whether males and females react differently to the receipt of a wealth transfer and the existence of different responses at the educational level and for elderly individuals.
We examine whether and how payout policy affects credit risk using evidence from the credit default swap (CDS) market. CDS spreads increase substantially in response to announcements of dividend cuts, especially during recessions and among firms experiencing financial distress. CDS spreads also react more strongly to permanent and less anticipated dividend cuts. The size of the CDS reaction is more pronounced for financial firms, which are inherently more opaque. In contrast, CDS spreads react weakly to dividend raises and share repurchases. The results show that the information effect of dividend changes dominates the wealth-transfer effect. This paper was accepted by Kay Giesecke, finance.
Wealth transfer taxes have had a long history in Canada: the Rowell-Sirois report suggested federal administration; the Carter report emphasized the importance of including wealth transfers in income. Yet by the 1980s wealth transfer taxes had largely disappeared in Canada. This article makes the case for consideration of an accession tax, which taxes wealth transfers in the recipients' hands. An accession tax has significant administrative advantages over the annual wealth tax featured in current popular debates.