Persistency of Window Dressing Practices in the U.S. Repo Markets after the GFC: The Unexplored Role of the Deposit Insurance Premium

We investigate whether the regulatory improvements made in the aftermath of the global financial crisis (GFC) have been effective in limiting bank downward window dressing by means of repos in the U.S. Using hand-collected data of U.S. bank holding companies (BHCs) over the period 2011Q2-2016Q1, we find that a strict application of the Basel III regulation wipes out incentives to engage in window dressing to bolster the level of leverage Tier 1 ratio at quarter-end. We also uncover an unexplored channel that induces banks to window dress. Specifically, we show that the persistency of window dressing is related to the computation of the Federal Deposit Insurance Corporation assessment base, which motivates banks to engage in window dressing to reduce the deposit insurance premium. Our findings call for greater emphasis on supervision of banks’ window dressing practices.