Economic Consequences of the AOCI Filter Removal for Advanced Approaches Banks

67 Pages Posted: 18 Nov 2017 Last revised: 26 Jul 2018

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: June 26, 2018

Abstract

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 the regulatory capital volatility resulting from the AOCI filter removal, advanced approaches banks increased the proportion of investment securities they classified as held to maturity, thereby limiting their financing/liquidity and interest-rate-risk management options, and they shifted their investment security holdings into safer types of securities, 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 invest in riskier loans to increase 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 (June 26, 2018). 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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