Are banks’ below-par own debt repurchases a cause for prudential concern?

Martien Lubberink

MPRA Paper from University Library of Munich, Germany

Abstract: In the lead-up to the implementation of Basel III, European banks bought back debt securities that traded at a discount. Banks engaged in these Liability Management Exercises (LMEs) to realize a fair value gain that the accounting and prudential rules exclude from regulatory capital calculations, this to safeguard the safety and soundness of the banking system. For a sample of 720 European LMEs conducted from April 2009 to December 2013, I show that banks lost about 9.3 billion euros in premiums to compensate investors for parting from their debt securities. This amount would have been recognized as Core Tier 1 regulatory capital, if regulation would accept the recognition of fair value gains on debt. The premiums paid are particularly high for the most loss absorbing capital securities. More importantly, the premiums increase with leverage and in times of stress, right when conserving cash is paramount to preserve the safety and soundness of the banking system. These results weaken the case of the exclusion from regulatory capital of unrealized gains that originate from a weakened own credit standing.

Keywords: Banking; repurchases; subordinated debt. (search for similar items in EconPapers)
JEL-codes: E58 G21 G28 G32 G35 M41 (search for similar items in EconPapers)
Date: 2014-10-20
New Economics Papers: this item is included in nep-ban, nep-cfn, nep-mac and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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https://mpra.ub.uni-muenchen.de/80729/8/MPRA_paper_80729.pdf revised version (application/pdf)

Related works:
Working Paper: Are banks’ below-par own debt repurchases a cause for prudential concern? (2016)
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