Bank Earnings and Regulatory Capital Management Using Available for Sale Securities

Mary E. Barth, Javier Gomez-Biscarri, Ron Kasznik and German Lopez-Espinosa
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Mary E. Barth: Stanford University
Javier Gomez-Biscarri: Universitat Pompeu Fabra and Barcelona GSE
Ron Kasznik: Stanford University
German Lopez-Espinosa: Universidad Navarra

Research Papers from Stanford University, Graduate School of Business

Abstract: We address banks' use of available-for-sale (AFS) securities to manage earnings and regulatory capital. Although prior research investigates banks' use of realized securities gains and losses to smooth earnings and regulatory capital, results are mixed. Creation of AFS securities and enhanced disclosures permit more powerful tests and new insights. We find banks realize gains and losses on AFS securities to smooth earnings and regulatory capital, and banks with more accumulated unrealized gains and losses do so to a greater extent. Banks with negative earnings realize losses to take a big bath, unless they have accumulated unrealized gains that offset the negative earnings. If so, they smooth earnings. Our inferences apply to non-listed and listed banks, which suggests the incentives do not derive solely from public capital market pressures. Our findings reveal the discretion afforded by historical cost-based accounting for AFS securities gains and losses enables banks to manage earnings and regulatory capital.

JEL-codes: G12 M41 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-ban and nep-mfd
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:ecl:stabus:3047

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