Persistency of window dressing practices in the U.S. repo markets after the GFC: The unexplored role of the deposit insurance premium

Abstract

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Window dressing of regulatory metrics: Evidence from repo markets

“…Kotidis and van Horen (2018) assess the impact of a change in U.K. regulation on reporting and measurement of the leverage ratio and find that dealers subject to a more binding leverage ratio reduced liquidity in the repo market. 3 Finally, Reghezza et al (2022) find that for U.S. bank holding companies (BHCs) the requirement to report their leverage ratios on a quarter-average basis has wiped out incentives to engage in window dressing behaviour. However, they show that the persistence of window dressing is related to the computation of the Federal Deposit Insurance Corporation assessment base, which motivates banks to window dress to reduce the deposit insur-ance premium.…”

Goodhart's Law in China: Bank Branching Regulation and Window Dressing

“…Prior studies document window dressing related to portfolio choice by mutual funds, pension funds, and other institutional investors (Lakonishok et al, 1991;Musto, 1997;Ortiz et al, 2012;Chen et al, 2016), and upward adjustment of assets reported by banks at the quarter-end reporting date (Allen and Saunders, 1992). The discussions on window dressing in the post-GFC period particularly focus on capital ratios, leverage ratios, and repo markets (Munyan, 2017;Anbil and Senyuz, 2018;Behn et al, 2019;Jaafar et al, 2022). Unlike prior studies that document window dressing behavior with possible implications for market prices, firm financing, or mergers, we analyze window dressing with possible implications for banks' organizational structure and investment in bank branches, which is novel in the literature.…”

Goodhart's Law in China: Bank Branching Regulation and Window Dressing

“…Prior studies document window dressing related to portfolio choice by mutual funds, pension funds, and other institutional investors (Lakonishok et al, 1991;Musto, 1997;Ortiz et al, 2012;Chen et al, 2016), and upward adjustment of assets reported by banks at the quarter-end reporting date (Allen and Saunders, 1992). The discussions on window dressing in the post-GFC period particularly focus on capital ratios, leverage ratios, and repo markets (Munyan, 2017;Anbil and Senyuz, 2018;Behn et al, 2019;Jaafar et al, 2022). Unlike prior studies that document window dressing behavior with possible implications for market prices, firm financing, or mergers, we analyze window dressing with possible implications for banks' organizational structure and investment in bank branches, which is novel in the literature.…”