Template-Type: ReDIF-Paper 1.0

Author-Name: Angelo Baglioni
Author-X-Name-First: Angelo
Author-X-Name-Last: Bgalioni
Author-Email: angelo.baglioni@unicatt.it
Author-Workplace-Name: Università Cattolica del Sacro Cuore
Author-Workplace-Name: Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore

Author-Name: Marcello Esposito
Author-X-Name-First: Marcello
Author-X-Name-Last: Esposito


Title: Modigliani-Miller Doesn’t Hold in a “Bailinable” World: A New Capital Structure to Reduce the Banks’ Funding Cost.


Abstract: To protect retail investors from the bail-in rule, we propose that banks should issue subordinated “contractual bail-in instruments”, as defined in the BRRD, for an amount (together with Tier1 capital) at least equal to 8% of their liabilities. We support our argument by means of a theoretical model, where retail investors are uncertainty averse, due to their lack of information about the new “bailinable” regime. To the contrary, institutional investors are better informed. Within this framework, a bank is able to reduce the cost of debt by splitting it into a junior and a senior tranche, sold to institutional and retail investors respectively. This result is a deviation from the Modigliani – Miller theorem. We also provide some estimates of the amounts of contractual bail-in instruments that European banks should issue in order to reach the 8% target level. Such amounts are considerable, implying that the solution proposed here should be implemented gradually over a transition period.
Length: 16
Creation-Date: 2016-11
File-URL: http://dipartimenti.unicatt.it/economia-finanza-def052.pdf
File-Format: Application/pdf
File-Function: First version, 2016
Number: def052
Classification-JEL: G21, G28. 
Keywords: banks, capital structure, bail-in, resolution, regulation.
Handle: RePEc:ctc:serie1:def052