Economic Consequences of the AOCI Filter Removal for Advanced Approaches Banks

56 Pages Posted: 18 Nov 2017 Last revised: 11 Jan 2019

See all articles by Sehwa Kim

Sehwa Kim

University of Chicago - Booth School of Business

Seil Kim

Baruch College, City University of New York

Stephen G. Ryan

New York University (NYU) - Leonard N. Stern School of Business

Date Written: January 7, 2019

Abstract

Appendix available here: https://ssrn.com/abstract=3312275.

We examine economic consequences of US bank regulators’ phased removal of the prudential filter for accumulated other comprehensive income for advanced approaches banks beginning on January 1, 2014. The primary effect of the AOCI filter is to exclude unrealized gains and losses on available-for-sale securities from banks’ regulatory capital. We predict and find that, to mitigate regulatory capital volatility resulting from the filter removal, advanced approaches banks increased the proportion of investment securities classified as held to maturity, thereby limiting their financing and interest-rate-risk management options, and they decreased securities risk, thereby reducing their interest rate spread. We further predict and find that these banks borrow more under securities repurchase agreements potentially collateralized by held-to-maturity securities and reduce loan supply owing to their reduced financing options, and that they increase loan risk to mitigate the decrease in their interest rate spread.

Keywords: Banks; regulation; regulatory capital; AOCI filter; investment securities

JEL Classification: G21, G28, M41, M48

Suggested Citation

Kim, Sehwa and Kim, Seil and Ryan, Stephen G., Economic Consequences of the AOCI Filter Removal for Advanced Approaches Banks (January 7, 2019). 29th Annual Conference on Financial Economics & Accounting 2018; Baruch College Zicklin School of Business Research Paper No. 2018-10-06. Available at SSRN: https://ssrn.com/abstract=3071942 or http://dx.doi.org/10.2139/ssrn.3071942

Sehwa Kim

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Seil Kim (Contact Author)

Baruch College, City University of New York ( email )

One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States

Stephen G. Ryan

New York University (NYU) - Leonard N. Stern School of Business ( email )

44 West 4th Street, Suite 10-73
New York, NY 10012-1118
United States
212-998-0020 (Phone)

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