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Regulation and risk shuffling in bank securities portfolios

Author

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  • Fuster, Andreas

    (Swiss National Bank)

  • Vickery, James

    (Federal Reserve Bank of New York)

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.

Suggested Citation

  • Fuster, Andreas & Vickery, James, 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. 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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    More about this item

    Keywords

    bank; securities; available-for-sale; capital regulation; fair value accounting;

    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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