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Bank Earnings and Regulatory Capital Management Using Available for Sale Securities


  • Barth, Mary E.

    (Stanford University)

  • Gomez-Biscarri, Javier

    (Universitat Pompeu Fabra and Barcelona GSE)

  • Kasznik, Ron

    (Stanford University)

  • Lopez-Espinosa, German

    (Universidad Navarra)


We address banks' use of available-for-sale (AFS) securities to manage earnings and regulatory capital. Although prior research investigates banks' use of realized securities gains and losses to smooth earnings and regulatory capital, results are mixed. Creation of AFS securities and enhanced disclosures permit more powerful tests and new insights. We find banks realize gains and losses on AFS securities to smooth earnings and regulatory capital, and banks with more accumulated unrealized gains and losses do so to a greater extent. Banks with negative earnings realize losses to take a big bath, unless they have accumulated unrealized gains that offset the negative earnings. If so, they smooth earnings. Our inferences apply to non-listed and listed banks, which suggests the incentives do not derive solely from public capital market pressures. Our findings reveal the discretion afforded by historical cost-based accounting for AFS securities gains and losses enables banks to manage earnings and regulatory capital.

Suggested Citation

  • Barth, Mary E. & Gomez-Biscarri, Javier & Kasznik, Ron & Lopez-Espinosa, German, 2014. "Bank Earnings and Regulatory Capital Management Using Available for Sale Securities," Research Papers 3047, Stanford University, Graduate School of Business.
  • Handle: RePEc:ecl:stabus:3047

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    Cited by:

    1. Justin Chircop & Zoltán Novotny-Farkas, 2014. "The economic consequences of including fair value adjustments to shareholders’ equity in regulatory capital calculations," CERS-IE WORKING PAPERS 1426, Institute of Economics, Centre for Economic and Regional Studies.
    2. Fernandes, Marcelo & Igan, Deniz & Pinheiro, Marcelo, 2020. "March madness in Wall Street: (What) does the market learn from stress tests?," Journal of Banking & Finance, Elsevier, vol. 112(C).
    3. Mittal, Amit & Garg, Ajay Kumar, 2016. "How do Indian firms cope with a crisis? Earnings management characteristics of CNX Nifty 100 companies," MPRA Paper 85353, University Library of Munich, Germany.
    4. Isabel Argimón & Ángel Estrada & Michel Dietsch, 2015. "Prudential filters, portfolio composition and capital ratios in european banks," Working Papers 1538, Banco de España;Working Papers Homepage.
    5. Argimón, Isabel & Dietsch, Michel & Estrada, Ángel, 2018. "Prudential filters, portfolio composition at fair value and capital ratios in European banks," Journal of Financial Stability, Elsevier, vol. 39(C), pages 187-208.

    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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