Regulatory capital management and available-for-sale securities: Evidence from the Covid-19 pandemic

Makafui Anani and Eman Ibrahem Elwasify

Finance Research Letters, 2023, vol. 58, issue PA

Abstract: Using the Covid-19 pandemic as an exogenous shock to banks’ regulatory capital in a difference-in-differences framework, we find evidence consistent with a crisis-induced regulatory capital management through realized gains on available-for-sale securities. In the cross-section, the results are more pronounced, as expected, for non-advanced approaches banks who filter unrealized available-for-sale securities gains or losses from CET 1 capital. Validation tests reveal an increase (decrease) in banks’ CET 1 capital ratio (available-for-sale and held-to-maturity securities holdings) amid the pandemic. By implication, banks tend to exploit the discretion offered by accounting standards and prudential requirements to manage regulatory capital ratios in times of stress.

Keywords: Covid-19; Regulatory capital management; Available-for-sale securities; AOCI filter; ASC 320 (search for similar items in EconPapers)
JEL-codes: G20 G21 G28 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:58:y:2023:i:pa:s1544612323006967

DOI: 10.1016/j.frl.2023.104324

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