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Window dressing of regulatory metrics: evidence from repo markets

Author

Listed:
  • Bassi, Claudio
  • Behn, Markus
  • Grill, Michael
  • Waibel, Martin
Abstract
This paper investigates both the magnitude and the drivers of bank window dressing behaviour in euro-denominated repo markets. Using a confidential transaction-level data set, our analysis illustrates that banks engineer an economically sizeable contraction in their repo transactions around regulatory reporting dates. We establish a causal link between these reductions and banks’ incentives to window dress and document the role of the leverage ratio and the G-SIB framework as the most relevant drivers of window dressing behaviour. Our findings suggest that regulatory action is warranted to limit banks’ ability to window dress. JEL Classification: C23, G14, G18, G21, G28

Suggested Citation

  • Bassi, Claudio & Behn, Markus & Grill, Michael & Waibel, Martin, 2023. "Window dressing of regulatory metrics: evidence from repo markets," Working Paper Series 2771, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20232771
    Note: 2203070
    as

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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2771~fc55bab0d6.en.pdf
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    References listed on IDEAS

    as
    1. Lakonishok, Josef, et al, 1991. "Window Dressing by Pension Fund Managers," American Economic Review, American Economic Association, vol. 81(2), pages 227-231, May.
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    5. Allen, Linda & Saunders, Anthony, 1992. "Bank window dressing: Theory and evidence," Journal of Banking & Finance, Elsevier, vol. 16(3), pages 585-623, June.
    6. Fritsche, Jan Philipp & Grill, Michael & Lambert, Claudia, 2020. "Bond market liquidity and swap market efficiency – what role does the repo market play?," Economic Bulletin Boxes, European Central Bank, vol. 1.
    7. Brand, Claus & Ferrante, Lorenzo & Hubert, Antoine, 2019. "From cash- to securities-driven euro area repo markets: the role of financial stress and safe asset scarcity," Working Paper Series 2232, European Central Bank.
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    10. Sriya Anbil & Zeynep Senyuz, 2018. "The Regulatory and Monetary Policy Nexus in the Repo Market," Finance and Economics Discussion Series 2018-027, Board of Governors of the Federal Reserve System (U.S.).
    11. Luca Baldo & Annalisa Bucalossi & Antonio Scalia, 2018. "Leverage Ratio and Central Bank Operations in the Euro Area," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 47(1), pages 21-68, February.
    12. Markus Behn & Giacomo Mangiante & Laura Parisi & Michael Wedow, 2022. "Behind the Scenes of the Beauty Contest—Window Dressing and the G-SIB Framework," International Journal of Central Banking, International Journal of Central Banking, vol. 18(5), pages 1-42, December.
    13. Allahrakha, Meraj & Cetina, Jill & Munyan, Benjamin, 2018. "Do higher capital standards always reduce bank risk? The impact of the Basel leverage ratio on the U.S. triparty repo market," Journal of Financial Intermediation, Elsevier, vol. 34(C), pages 3-16.
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    Full references (including those not matched with items on IDEAS)

    Citations

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    Cited by:

    1. Justus Inhoffen & Iman van Lelyveld, 2023. "Safe Asset Scarcity and Re-use in the European Repo Market," Working Papers 787, DNB.
    2. Cristina Di Luigi & Antonio Perrella & Alessio Ruggieri, 2024. "The fundamental role of the repo market and central clearing," Mercati, infrastrutture, sistemi di pagamento (Markets, Infrastructures, Payment Systems) 48, Bank of Italy, Directorate General for Markets and Payment System.

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    More about this item

    Keywords

    banking regulation; G-SIBs; leverage ratio; repo markets; window dressing;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • 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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