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Banks’ asset and liability valuation in the new regulatory environment: a game theory perspective

Author

Listed:
  • Amira Annabi

    (Manhattan College)

  • Alicja K. Reuben

    (NYU Abu Dhabi)

Abstract

In the aftermath of the global financial crisis, US regulators have required banks to disclose more details regarding the valuation techniques of their traded assets and liabilities. Using data from 2013 to 2014 annual reports for nine primary dealers, we examine the determinants of the choice of the valuation techniques in a game theory setup. Consistent with their publicly disclosed shareholder policy, we assume that the banks’ objective is to maximize their return on equity. Our key findings are threefold. First, we show that the optimal strategy for the global systemically important banks (G-SIBs) is to select the valuation techniques associated with a lower level of risk. Conversely, the optimal strategy for the non-G-SIBs is to select the valuation techniques associated with a higher level of risk. Finally, we demonstrate that the above optimal strategies are consistent over time. These findings are in line with the regulators’ mindset to reduce the balance sheet riskiness of G-SIBs.

Suggested Citation

  • Amira Annabi & Alicja K. Reuben, 2017. "Banks’ asset and liability valuation in the new regulatory environment: a game theory perspective," Journal of Banking Regulation, Palgrave Macmillan, vol. 18(4), pages 302-309, November.
  • Handle: RePEc:pal:jbkreg:v:18:y:2017:i:4:d:10.1057_s41261-017-0038-z
    DOI: 10.1057/s41261-017-0038-z
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    References listed on IDEAS

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    1. Moshirian, Fariborz, 2011. "The global financial crisis and the evolution of markets, institutions and regulation," Journal of Banking & Finance, Elsevier, vol. 35(3), pages 502-511, March.
    2. Moshirian, Fariborz, 2012. "The future and dynamics of global systemically important banks," Journal of Banking & Finance, Elsevier, vol. 36(10), pages 2675-2679.
    3. Moenninghoff, Sebastian C. & Ongena, Steven & Wieandt, Axel, 2015. "The perennial challenge to counter Too-Big-to-Fail in banking: Empirical evidence from the new international regulation dealing with Global Systemically Important Banks," Journal of Banking & Finance, Elsevier, vol. 61(C), pages 221-236.
    4. Patrick Slovik, 2012. "Systemically Important Banks and Capital Regulation Challenges," OECD Economics Department Working Papers 916, OECD Publishing.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Great recession; Game theory; Global systemically important banks; Return on equity; Valuation techniques;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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