Regulation and Risk Shuffling in Bank Securities Portfolios

44 Pages Posted: 15 Jun 2018

See all articles by Andreas Fuster

Andreas Fuster

École Polytechnique Fédérale de Lausanne; Swiss Finance Institute; Centre for Economic Policy Research (CEPR)

James I. Vickery

Federal Reserve Bank of Philadelphia

Date Written: June , 2018

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.

Keywords: bank, securities, available-for-sale, capital regulation, fair value accounting

JEL Classification: G21, G23, G28

Suggested Citation

Fuster, Andreas and Vickery, James Ian, Regulation and Risk Shuffling in Bank Securities Portfolios (June , 2018). FRB of New York Staff Report No. 851, Available at SSRN: https://ssrn.com/abstract=3197365 or http://dx.doi.org/10.2139/ssrn.3197365

Andreas Fuster

École Polytechnique Fédérale de Lausanne ( email )

Quartier UNIL-Chamberonne
Bâtiment Extranef
CH-1015 Lausanne
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

James Ian Vickery (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

10 Independence Mall
Philadelphia, PA 19106
United States
+12155746549 (Phone)

HOME PAGE: http://www.vickeryjames.com

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