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Quarter-end repo borrowing dynamics and bank risk opacity

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  • Edward L. Owens

    (Emory University)

  • Joanna Shuang Wu

    (University of Rochester)

Abstract

We investigate the extent to which banks’ quarter-end borrowings in the repurchase market deviate from within-quarter levels, and associated factors. Quarter-end repo liabilities are materially lower than within-quarter averages for a large fraction of sample banks. These deviations are more pronounced at banks with a higher concentration of repo borrowings in their liability structure and with larger absolute trading gains or losses. Furthermore, the association with trading activity is mitigated when banks are better capitalized. We also find that these deviations are associated with bank depositor and borrower behavior. Together, the evidence suggests that deviations reflect both active window dressing and passive customer-driven liquidity dynamics. We document that unexpected downward quarter-end deviations in repo liabilities are associated with adverse short-term capital market consequences. Over the long term, banks with more frequent downward quarter-end deviations exhibit higher credit risk, but we find mixed evidence for equity market valuation multiples.

Suggested Citation

  • Edward L. Owens & Joanna Shuang Wu, 2015. "Quarter-end repo borrowing dynamics and bank risk opacity," Review of Accounting Studies, Springer, vol. 20(3), pages 1164-1209, September.
    • Handle: RePEc:spr:reaccs:v:20:y:2015:i:3:d:10.1007_s11142-015-9330-2
    DOI: 10.1007/s11142-015-9330-2
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    Keywords

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    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General

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