Prudential filters, portfolio composition and capital ratios in european banks

Isabel Argimon (), Angel Estrada and Michel Dietsch

No 1538, Working Papers from Banco de España

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 removed from banks’ regulatory capital. Using a sample of European banks, and taking advantage of the different treatment afforded, under Basel II, to 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 (neutralisation), 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 removal of neutralisation would impact capital ratios.

Keywords: prudential regulation; regulatory capital; fair value accounting; prudential filters (search for similar items in EconPapers)
JEL-codes: G21 M41 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2015-12
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 (2)

Downloads: (external link)
http://www.bde.es/f/webbde/SES/Secciones/Publicaci ... /15/Fich/dt1538e.pdf First version, December 2015 (application/pdf)

Related works:
Working Paper: Prudential filters, portfolio composition and capital ratios in European banks (2016)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:1538

Access Statistics for this paper

More papers in Working Papers from Banco de España Contact information at EDIRC.
Bibliographic data for series maintained by Ángel Rodríguez. Electronic Dissemination of Information Unit. Research Department. Banco de España ().