TY - JOUR

T1 - Persistency of Window Dressing Practices in the U.S. Repo Markets after the GFC: The Unexplored Role of the Deposit Insurance Premium

AU - Jaafar, Aziz

AU - Reghezza, Alessio

AU - Polizzi, Salvatore

N1 - Open Access Funding provided by Universita degli Studi di Palermo within the CRUI-CARE Agreement.

PY - 2023/3

Y1 - 2023/3

N2 - 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.

AB - 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.

KW - Window Dressing

KW - Leverage Tier 1 Ratio

KW - Deposit Insurance Premium

KW - Repurchase Agreements

KW - Bank Holding Companies

U2 - 10.1111/eufm.12367

DO - 10.1111/eufm.12367

M3 - Article

VL - 29

SP - 634

EP - 663

JO - European Financial Management

JF - European Financial Management

SN - 1354-7798

IS - 2

ER -