Saturday, Jan. 4, 2020 10:15 AM - 12:15 PM (PDT)
- Chair: Stacey Schreft, U.S. Office of Financial Research
Banks as Regulated Traders
AbstractBanks use trading as a vehicle to take risk. Using unique high-frequency regulatory data, we estimate the sensitivity of weekly bank trading profits to aggregate equity, fixed-income, credit, currency and commodity risk factors. U.S. banks had large trading exposures to equity market risk before the Volcker Rule, which they curtailed afterwards. They also have exposures to credit and currency risk. The results hold up in a quasi-natural experimental design that exploits the phased-in introduction of reporting requirements to address identification. Timing, heterogeneity, and placebo tests further corroborate the results. Counterfactual and stress-test analyses quantify the financial stability implications.
Systemic Portfolio Diversification
AbstractWe study the implications of re-sale externalities on balance sheet composition. Banks select their asset holdings to minimize expected execution costs triggered by the need to comply with regulatory leverage requirements. We show that if banks disregard the price impact caused by other banks' liquidation actions, they hold an excessively diversified portfolio. Banks seek systemic diversification when they account for the negative externalities imposed by other banks' liquidation actions. Social costs can be reduced by a tax on portfolio overlap, or by enforcing policies which mandate the split of a bank into smaller institutions with heterogeneous leverage ratios.
- G2 - Financial Institutions and Services