We investigate whether the regulatory improvements made in the aftermath of the global financial crisis (GFC) have been effective in limiting bank downward window dressing by means of repos in the U.S. We find that a strict application of the Basel III regulation wipes out incentives to engage in window dressing to bolster the level of leverage Tier 1 ratio at quarter‐end. We also show that the persistency of window dressing is related to the computation of the Federal Deposit Insurance Corporation assessment base, which motivates banks to engage in window dressing to reduce the deposit insurance premium.
Persistency of window dressing practices in the US repo markets after the GFC: The unexplored role of the deposit insurance premium
Alessio Reghezza
2022-01-01
Abstract
We investigate whether the regulatory improvements made in the aftermath of the global financial crisis (GFC) have been effective in limiting bank downward window dressing by means of repos in the U.S. We find that a strict application of the Basel III regulation wipes out incentives to engage in window dressing to bolster the level of leverage Tier 1 ratio at quarter‐end. We also show that the persistency of window dressing is related to the computation of the Federal Deposit Insurance Corporation assessment base, which motivates banks to engage in window dressing to reduce the deposit insurance premium.
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