Securities Portfolio Management in the Banking Sector

Abstract

We develop a method to measure the securities purchasing and selling activity of banks using publicly available data from regulatory filings. Using this data, we document stylized empirical facts and explain securities portfolio management through the lens of contemporaneous balance sheet movements. When focusing on balance sheet changes that are exogenous from the bank's perspective, we find that deposit shocks have the greatest explanatory power. We also find that banks only sell securities to meet deposit withdrawals when cash holdings are low and that, contrary to expectation, only well-capitalized banks sell their risky securities in these cases. Overall, our findings demonstrate unintended consequences on bank securities management from the post-GFC changes in bank regulation and provide guidance for modeling the risk of financial fire sales in regulatory stress testing exercises.

Keywords: indirect contagion, systemic risk, macroprudential supervision

JEL Classification: G20, G21, G28