Banks: Liability Value and Optimal Capital Structure

Top of JPMorgan Chase Tower
Top of JPMorgan Chase Tower, one of the biggest bank in US. Photo: wikimedia
PhD Defense

28 December 2016 12:08

(updated: 28 December 2016 12:25)

Banks: Liability Value and Optimal Capital Structure

On Wednesday January 11 Nikhil Atreya will hold a trial lecture on a prescribed topic and defend his thesis for the PhD degree at NHH.

Prescribed topic for the trial lecture:

Contingent convertible bonds (CoCos): An overview of current research, regulations, and industry practice

Trial lecture:

10:15 in Jebsen Centre, NHH

Title of the thesis:

Banks: Liability Value and Optimal Capital Structure Under Alternative Asset Specifications


Banks are a special type of firm whose assets mainly consist of the liabilities of other firms or individuals. As providers of credit to firms and individuals, banks play an important role in the smooth functioning of an economy. The economic importance of banks is the reason that banking is one of the most regulated and researched industries in the world.

The financial crisis of 2007-09 has focused banking research in the areas of bank leverage, the riskiness of a bank’s assets, the valuation of bank liabilities, and the introduction of new types of bank issued securities to help insulate the wider economy from a banking crisis. Atreya´ s thesis touches on these topics while explicitly modeling a bank’s assets as asset backed loans.

The first essay is co-authored with Aksel Mjøs and Svein-Arne Persson. They investigate potential causes for the high levels of bank leverage observed in practice, and find that when unconstrained by regulation a bank’s shareholders find it optimal, for reasonable values of borrower risk parameters, to select a bank leverage close to 100%.

In the second essay, Atreya constructs a theoretical model to price a contingent convertible bond (CoCo) issued by a bank. The difference between his approach and that of others who price CoCos, is that Atreya models the bank’s assets as loans, instead of imposing the standard assumption that total assets are modeled by a geometric Brownian motion (GBM). He finds that the limited upside of the bank’s loan assets causes a risk premium in the yield of the CoCos that cannot be captured by using a GBM to model the bank’s assets.

Atreya values the liabilities of a bank whose assets consist of a portfolio of correlated loans in the third essay. Using parallel computing techniques, he quantifies the effect of intra portfolio correlation on the value of the bank’s liabilities.


12:15 in Jebsen Centre, NHH

Members of the evaluation committee:

Professor Petter Bjerksund (leader of the committee), Department of Business and Management Science, NHH

Associate Professor Svetlana Borovkova, Vrije Universiteit Amsterdam

Professor Suresh Sundaresan, Columbia Business School


Professor Svein-Arne Persson (principal supervisor), Department of Finance, NHH

Professor Jan Ubøe, Department of Business and Management Science, NHH

Professor Leif K. Sandal, Department of Business and Management Science, NHH

The trial lecture and thesis defense will be open to the public. Copies of the thesis will be available from

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