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Regulatory capital management and available-for-sale securities: Evidence from the Covid-19 pandemic

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  • Anani, Makafui
  • Elwasify, Eman Ibrahem

Abstract

Using the Covid-19 pandemic as an exogenous shock to banks’ regulatory capital in a difference-in-differences framework, we find evidence consistent with a crisis-induced regulatory capital management through realized gains on available-for-sale securities. In the cross-section, the results are more pronounced, as expected, for non-advanced approaches banks who filter unrealized available-for-sale securities gains or losses from CET 1 capital. Validation tests reveal an increase (decrease) in banks’ CET 1 capital ratio (available-for-sale and held-to-maturity securities holdings) amid the pandemic. By implication, banks tend to exploit the discretion offered by accounting standards and prudential requirements to manage regulatory capital ratios in times of stress.

Suggested Citation

  • Anani, Makafui & Elwasify, Eman Ibrahem, 2023. "Regulatory capital management and available-for-sale securities: Evidence from the Covid-19 pandemic," Finance Research Letters, Elsevier, vol. 58(PA).
    • Handle: RePEc:eee:finlet:v:58:y:2023:i:pa:s1544612323006967
    DOI: 10.1016/j.frl.2023.104324
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    More about this item

    Keywords

    Covid-19; Regulatory capital management; Available-for-sale securities; AOCI filter; ASC 320;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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