Faculty of Economics and Business Administration Publications Database

From Wall Street to Main Street – How Banks can offload their Asset Risk onto Retail Investors

Koziol, Christian
Volume: 67
Number: 3
Pages: 290 - 332
Month: July
ISSN-Print: 1439-2917
ISSN-Online: 2194-072X
Link External Source: Online Version
Year: 2015

We examine the motives of financial institutions to issue retail structured products as a funding source and as a tool for risk management. For this purpose, we construct a Merton-type model with taxes and bankruptcy costs. High-risk issuers can increase their firm value and stability given they keep the leverage ratio fixed. If issuers optimally adjust their capital structure, then they add retail structured products to the financing mix when their assets are risky and the correlation to the underlying asset is positive. Principal protected notes make default more likely, whereby discount notes decrease default risk.