De-Risking Through Equity Holdings: Bank and Insurer Behavior Under Capital Requirements

Posted: 9 Jun 2020

See all articles by Liu Yang

Liu Yang

Southeast Missouri State University; University of Miami - Department of Accounting

Qing Zhou

Department of Applied Finance and Actuarial Studies, Macquarie University

Min Zhu

University of Queensland

Date Written: April 30, 2020

Abstract

Using a sample from 1980 to 2018, we find that banks and insurers in U.S. diversify financial risk through their equity holdings. They tend to offset the risk of increased leverage by lowering the leverage of the non-financial firms in which they take an equity stake. We attribute this finding to the impact of risk-based capital regulations. Facing the high cost of equity, financial institutions are well incentivized to comply with increased capital requirements by reducing asset risk. Our results demonstrate that the scope of the induced de-risking activities of these institutions is not limited to their credit portfolios but extends to their equity exposure as well. We also show that non-financial firms that are concerned about being dropped by these financial institutions could deleverage to deviate from their theoretically optimal capital structures. These novel empirical regularities need to be included in debates about capital regulations for banks and insurance companies.

Keywords: Risk-based capital requirements; Capital structure; De-risking; Security issues

JEL Classification: G32; G21; G28

Suggested Citation

Yang, Liu and Zhou, Qing and Zhu, Min, De-Risking Through Equity Holdings: Bank and Insurer Behavior Under Capital Requirements (April 30, 2020). Available at SSRN: https://ssrn.com/abstract=3595806

Liu Yang (Contact Author)

Southeast Missouri State University ( email )

1 University Plaza
Cape Girardeau, MO MO 63701
United States

University of Miami - Department of Accounting ( email )

Coral Gables, FL 33146-6531
United States

Qing Zhou

Department of Applied Finance and Actuarial Studies, Macquarie University ( email )

Sydney, NSW
Australia

Min Zhu

University of Queensland ( email )

St Lucia
Brisbane, Queensland 4072
Australia

HOME PAGE: http://https://www.business.uq.edu.au/staff/min-zhu

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
80
PlumX Metrics