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The impact of complex financial instruments on banks’ vulnerability: empirical evidence on SSM banks

Author

Listed:
  • Tommaso Perez

    (Bank of Italy)

  • Francesco Potente

    (Bank of Italy)

  • Andrea Carboni

    (Bank of Italy)

  • Alberto Di Iorio

    (Bank of Italy)

  • Jacopo Raponi

    (Bank of Italy)

Abstract

Level 2 (L2) and Level 3 (L3) assets and liabilities represent a substantial portion of European banks’ balance sheets, and valuing them is extremely difficult, since no liquid market prices are available. This paper relies on a large panel of euro-area banks between 2014 and 2019, and two different econometric frameworks, in order to estimate the relationship between the holdings of selected instruments (L2, L3 and Non-Performing Loans, NPLs) and banks’ key performance and risk profile metrics, namely Credit Default Swaps (CDSs), Price-to-Book (PtB) ratios and Z-scores. It finds that larger holdings of L2 tend to be associated with higher CDSs, at least in the short run, while larger amounts of NPLs and L3 tend to characterize banks with higher CDSs, lower PtB ratios and worse Z-scores, other things being equal.

Suggested Citation

  • Tommaso Perez & Francesco Potente & Andrea Carboni & Alberto Di Iorio & Jacopo Raponi, 2021. "The impact of complex financial instruments on banks’ vulnerability: empirical evidence on SSM banks," Questioni di Economia e Finanza (Occasional Papers) 633, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:opques:qef_633_21
    as

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    File URL: https://www.bancaditalia.it/pubblicazioni/qef/2021-0633/QEF_633_21.pdf
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    References listed on IDEAS

    as
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    5. Hua-Wei Huang & Mai Dao & James M. Fornaro, 2016. "Corporate governance, SFAS 157 and cost of equity capital: evidence from US financial institutions," Review of Quantitative Finance and Accounting, Springer, vol. 46(1), pages 141-177, January.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    fair value accounting; level 2 instruments; level 3 instruments; non-performing loans; prudential regulation; panel data models;
    All these keywords.

    JEL classification:

    • 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
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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