Contingent Capital Trigger Effects: Evidence from Liability Management Exercises

This paper investigates the so called liability management exercises by European banks, which bear comparable effects to triggering contingent capital. I first explore the determinants of these exercises. I then study market reactions to these operations, and banks’ economic performance following them. Debtors positively receive these exercises, while stockholders discriminate according to the terms of the operation. Moreover, banks implementing liability management exercises exhibit higher economic performance than the ones that do not. These findings point towards contingent capital offering an effective solution to the dilemma of bank capital regulation.