Quarter-End Repo Borrowing Dynamics and Bank Risk Opacity

63 Pages Posted: 17 Apr 2011 Last revised: 27 May 2016

See all articles by Edward L. Owens

Edward L. Owens

Emory University - Department of Accounting

Joanna S. Wu

University of Rochester - Simon Business School

Date Written: April 1, 2014

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.

Keywords: Window dressing; sale and repurchase agreement; bank opacity; short-term borrowing

JEL Classification: G14, G21, G28, M40

Suggested Citation

Owens, Edward L. and Wu, Joanna, Quarter-End Repo Borrowing Dynamics and Bank Risk Opacity (April 1, 2014). Review of Accounting Studies, Vol. 30, No. 3, 2015. Available at SSRN: https://ssrn.com/abstract=1811110 or http://dx.doi.org/10.2139/ssrn.1811110

Edward L. Owens

Emory University - Department of Accounting ( email )

Goizueta Business School
1300 Clifton Road
Atlanta, GA 30322
United States

Joanna Wu (Contact Author)

University of Rochester - Simon Business School ( email )

Carol Simon Hall 3-160D
Rochester, NY 14627
United States
585-275-5468 (Phone)
585-442-6323 (Fax)

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