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Regulation and risk shuffling in bank securities portfolios

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Abstract

Bank capital requirements are based on a mix of market values and book values. We investigate the effects of a policy change that ties regulatory capital to the market value of the ?available-for-sale" investment securities portfolio for some banking organizations. Our analysis is based on security-level data on individual bank portfolios matched to bond characteristics. We find little clear evidence that banks respond by reducing the riskiness of their securities portfolios, although there is some evidence of a greater use of derivatives to hedge securities exposures. Instead, banks respond by reclassifying securities to mitigate the effects of the policy change. This shift is most pronounced for securities with high levels of interest rate risk.

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  • Andreas Fuster & James Vickery, 2018. "Regulation and risk shuffling in bank securities portfolios," Staff Reports 851, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:851
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    References listed on IDEAS

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    1. Andrew Ellul & Chotibhak Jotikasthira & Christian T. Lundblad & Yihui Wang, 2015. "Is Historical Cost Accounting a Panacea? Market Stress, Incentive Distortions, and Gains Trading," Journal of Finance, American Finance Association, vol. 70(6), pages 2489-2538, December.
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    3. Hanson, Samuel G. & Stein, Jeremy C., 2015. "Monetary policy and long-term real rates," Journal of Financial Economics, Elsevier, vol. 115(3), pages 429-448.
    4. Berger, Allen N. & Herring, Richard J. & Szego, Giorgio P., 1995. "The role of capital in financial institutions," Journal of Banking & Finance, Elsevier, vol. 19(3-4), pages 393-430, June.
    5. Laux, Christian & Leuz, Christian, 2009. "The crisis of fair-value accounting: Making sense of the recent debate," Accounting, Organizations and Society, Elsevier, vol. 34(6-7), pages 826-834, August.
    6. Calomiris, Charles W. & Nissim, Doron, 2014. "Crisis-related shifts in the market valuation of banking activities," Journal of Financial Intermediation, Elsevier, vol. 23(3), pages 400-435.
    7. Ellul, Andrew & Lundblad, Christian T & Wang, Yihui & Jotikasthira, Chotibhak, 2015. "Is Historical Cost Accounting a Panacea? Market Stress, Incentive Distortions, and Gains Trading," CEPR Discussion Papers 10450, C.E.P.R. Discussion Papers.
    8. Chircop, Justin & Novotny-Farkas, Zoltán, 2016. "The economic consequences of extending the use of fair value accounting in regulatory capital calculations," Journal of Accounting and Economics, Elsevier, vol. 62(2), pages 183-203.
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    Cited by:

    1. Farkas, Walter & Fringuellotti, Fulvia & Tunaru, Radu, 2020. "A cost-benefit analysis of capital requirements adjusted for model risk," Journal of Corporate Finance, Elsevier, vol. 65(C).
    2. Cao, Jin & Juelsrud, Ragnar E., 2022. "Opacity and risk-taking: Evidence from Norway," Journal of Banking & Finance, Elsevier, vol. 134(C).
    3. John Krainer & Pascal Paul, 2023. "Monetary Transmission through Bank Securities Portfolios," Working Paper Series 2023-18, Federal Reserve Bank of San Francisco.
    4. Richard K. Crump & João A. C. Santos, 2018. "Review of New York Fed studies on the effects of post-crisis banking reforms," Economic Policy Review, Federal Reserve Bank of New York, issue 24-2, pages 71-90.
    5. Wang, Olivier, 2020. "Banks, low interest rates, and monetary policy transmission," Working Paper Series 2492, European Central Bank.

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    More about this item

    Keywords

    bank; securities; available-for-sale; capital regulations; fair value accounting;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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