Banks’ Motivations for Designating Securities as Held to Maturity

49 Pages Posted: 26 May 2023 Last revised: 15 Apr 2024

See all articles by Sehwa Kim

Sehwa Kim

Columbia University - Columbia Business School

Seil Kim

Baruch College, City University of New York

Stephen G. Ryan

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

Date Written: April 15, 2024

Abstract

We show that banks classify fixed-rate debt investment securities as held to maturity (HTM) rather than as available for sale (AFS) when HTM classification provides preferred financial accounting and regulatory capital treatments, not because they have a distinct economically motivated intent and ability to hold the securities to maturity. Specifically, we document predictably divergent security classifications by three categories of banks that differ in whether the regulatory AOCI filter, which removes accumulated other comprehensive income from Tier 1 capital, applies in four subperiods of our 2012–2022 sample period. The boundaries of the subperiods reflect changes in the AOCI filter’s applicability in 2014 and 2019 and the sharp rise in interest rates beginning in late 2021. We further find that the bank categories differ in the interest rate risk of their AFS securities and the extents to which they hedge that risk and finance their assets with uninsured deposits.

Keywords: banks; investment securities; held to maturity; regulatory capital; AOCI filter

JEL Classification: G21; G28; M41; M48

Suggested Citation

Kim, Sehwa and Kim, Seil and Ryan, Stephen G., Banks’ Motivations for Designating Securities as Held to Maturity (April 15, 2024). Columbia Business School Research Paper No. 4452667, Available at SSRN: https://ssrn.com/abstract=4452667 or http://dx.doi.org/10.2139/ssrn.4452667

Sehwa Kim

Columbia University - Columbia Business School ( email )

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New York, NY 10027
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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 )

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New York, NY 10012-1118
United States
212-998-0020 (Phone)

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