Banks as regulated traders

Antonio Falato, Diana Iercosan and Filip Zikes

Journal of Financial Economics, 2025, vol. 170, issue C

Abstract: Banks use trading as a vehicle to take risk. Using high-frequency regulatory data, we estimate the sensitivity of weekly bank trading profits to aggregate equity, fixed-income, credit, currency, and commodity risk factors. Our estimates imply that U.S. banks had large trading exposures to equity market risk before the Volcker Rule, which they curtailed afterwards. Credit and currency risk exposures were smaller. The results hold up in a quasi-natural experiment that exploits the phased-in introduction of reporting requirements for identification. Total trading-book risk was also curtailed afterwards with material financial stability implications and no evidence of migration to other bank activities.

Keywords: Financial regulation; Bank risk taking (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:170:y:2025:i:c:s0304405x25000881

DOI: 10.1016/j.jfineco.2025.104080

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