Are Banks' Below-Par Own Debt Repurchases a Cause For Prudential Concern?

Posted: 1 Feb 2016 Last revised: 29 Aug 2017

See all articles by Martien Jan Peter Lubberink

Martien Jan Peter Lubberink

Victoria University of Wellington - School of Accounting and Commercial Law

Annelies Renders

Maastricht University

Date Written: October 21, 2016

Abstract

Leading up to the implementation of Basel III, European banks needed to substantially increase their capital ratios. To do this, banks made use of Liability Management Exercises (LMEs) in which they repurchased below-par debt securities. Banks are subject to a prudential filter that excludes from the calculation of capital ratios unrealized gains on debt securities arising from a deterioration in banks’ own credit standing. By repurchasing below-par debt securities, banks can circumvent the prudential filter as unrealized gains become realized and increase Core Tier 1 capital. We examine the determinants and consequences of these LMEs and provide evidence that these debt repurchases are a cause for prudential concern.

Keywords: banking, fair values, repurchases, subordinated debt

JEL Classification: E58, G21, G32, G35, M41

Suggested Citation

Lubberink, Martien Jan Peter and Renders, Annelies, Are Banks' Below-Par Own Debt Repurchases a Cause For Prudential Concern? (October 21, 2016). Journal of Accounting, Auditing and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2725828 or http://dx.doi.org/10.2139/ssrn.2725828

Martien Jan Peter Lubberink (Contact Author)

Victoria University of Wellington - School of Accounting and Commercial Law ( email )

New Zealand
+64 4 463 5968 (Phone)

Annelies Renders

Maastricht University ( email )

P.O. Box 616
Maastricht, 6200MD
Netherlands

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