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

Martien Lubberink and Annelies Renders

MPRA Paper from University Library of Munich, Germany

Abstract: Leading up to the implementation of Basel III, European banks repurchased below-par debt securities. Banks are subjected to a prudential filter that excludes unrealized gains on liabilities from changes in own credit standing from the calculation of capital ratios. By repurchasing securities, unrealized gains become realized and increase Core Tier 1 capital. We show that poorly capitalized banks repurchased securities and lost about e9.1bn in premiums to compensate debt holders. Banks also repurchased the most loss-absorbing securities, for which they paid the highest premiums. These premiums increase with leverage and in times of stress. Hence debt repurchases are a cause for prudential concern.

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: 2016-06-15
New Economics Papers: this item is included in nep-cfn, nep-cse, 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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Related works:
Working Paper: Are banks’ below-par own debt repurchases a cause for prudential concern? (2014)
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