Prudential filters, portfolio composition and capital ratios in European banks

Isabel Argimon (), Michel Dietsch and Angel Estrada

Debats Economiques et financiers from Banque de France

Abstract: European banks hold 10% of their total assets in portfolios that give rise to unrealised gains and losses which under Basel III will no longer be allowed to be excluded from banks’ regulatory capital. Using a sample of European banks, and taking advantage of the different regulatory treatments that are allowed, under Basel II, to account for such gains and losses among jurisdictions and instruments and over time, we find evidence that: a) the inclusion of unrealised gains and losses in capital ratios increases their volatility; b) the partial inclusion of unrealised gains and total inclusion of losses on fixed-income securities in regulatory capital, compared with the complete exclusion of both (or “neutralization”), reduces the volume of securities categorised as Available For Sale (AFS), thus potentially affecting liquidity management and demand for bonds (most of which are currently government bonds); and c) the higher the partial inclusion of gains from debt instruments, the lower the holdings of such instruments in the AFS category and the higher the regulatory Tier 1 capital ratio, thus affecting banks’ capital buffer strategy. We do not find evidence that the absence of neutralisation would impact capital ratios.

Keywords: Bank capital ratios; Bank regulation; Fair Value Accounting; Prudential Filters. (search for similar items in EconPapers)
JEL-codes: G21 M41 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2016
New Economics Papers: this item is included in nep-acc, nep-ban, nep-eec and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Related works:
Working Paper: Prudential filters, portfolio composition and capital ratios in european banks (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:bfr:decfin:22

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