Advertisement

Review of Accounting Studies

, Volume 20, Issue 3, pp 1164–1209 | Cite as

Quarter-end repo borrowing dynamics and bank risk opacity

  • Edward L. Owens
  • Joanna Shuang Wu
Article

Abstract

We investigate the extent to which banks’ quarter-end borrowings in the repurchase market deviate from within-quarter levels, and associated factors. Quarter-end repo liabilities are materially lower than within-quarter averages for a large fraction of sample banks. These deviations are more pronounced at banks with a higher concentration of repo borrowings in their liability structure and with larger absolute trading gains or losses. Furthermore, the association with trading activity is mitigated when banks are better capitalized. We also find that these deviations are associated with bank depositor and borrower behavior. Together, the evidence suggests that deviations reflect both active window dressing and passive customer-driven liquidity dynamics. We document that unexpected downward quarter-end deviations in repo liabilities are associated with adverse short-term capital market consequences. Over the long term, banks with more frequent downward quarter-end deviations exhibit higher credit risk, but we find mixed evidence for equity market valuation multiples.

Keywords

Window dressing Sale and repurchase agreement Bank opacity Short-term borrowing 

JEL Classification

G14 G21 G28 M40 

Notes

Acknowledgments

We thank Anne Beatty, Jose Berrospide, Robert Bushman, Elizabeth Chuk, Dan Collins, Anya Kleymenova (discussant), Anzhela Knyazeva, Phil Picariello, Scott Richardson (editor), Stephen Ryan, William Schwert, Robert Storch, Jerry Zimmerman, two anonymous reviewers, and workshop participants at George Washington University, London Business School, New York University, Rice University, University of Rochester, the University of Minnesota 2011 Empirical Research Conference, the Fifth Annual Toronto Accounting Research Conference, the 2012 Utah Winter Accounting Conference, and the 2014 Review of Accounting Studies Conference for helpful comments and suggestions.

References

  1. Afonso, G., Kovner, A., & Schoar, A. (2011). Stressed not frozen: The fed funds market in the financial crisis. Journal of Finance, 66, 1109–1139.CrossRefGoogle Scholar
  2. Allen, L., Peristiani, S., & Saunders, A. (1989). Bank size, collateral, and net purchase behavior in the federal funds market: empirical evidence. Journal of Business, 62, 501–515.CrossRefGoogle Scholar
  3. Allen, L., & Saunders, A. (1992). Bank window dressing: Theory and evidence. Journal of Banking & Finance, 16, 585–623.CrossRefGoogle Scholar
  4. Arora, N., Richardson, S., & Tuna, I. (2014). Asset reliability and security prices: evidence from credit markets. Review of Accounting Studies, 19, 363–395.CrossRefGoogle Scholar
  5. Badertscher, B., Burks, J., & Easton, P. (2015). Day 30: The tacit quarterly information event in the banking industry. Working paper.Google Scholar
  6. Barclay, M., & Smith, C. (1995). The maturity structure of corporate debt. Journal of Finance, 50, 609–631.CrossRefGoogle Scholar
  7. Beatty, A., Chamberlain, S., & Magliolo, J. (1995). Managing financial reports of commercial banks: the influence of taxes, regulatory capital, and earnings. Journal of Accounting Research, 33, 231–261.CrossRefGoogle Scholar
  8. Benmelech, E., & Dvir, E. (2013). Does short-term debt increase vulnerability to crisis? Evidence from the East Asian financial crisis. Journal of International Economics, 89, 485–494.CrossRefGoogle Scholar
  9. Board of Governors of the Federal Reserve System, 100th Annual Report. (2013). www.federalreserve.gov/publications/annual-report/files/2013-annual-report.pdf.
  10. Brunnermeier, M., & Pedersen, L. (2009). Market liquidity and funding liquidity. Review of Financial Studies, 22, 2201–2238.CrossRefGoogle Scholar
  11. Bushman, R., & Williams, C. (2012). Accounting discretion, loan loss provisioning, and discipline of banks’ risk taking. Journal of Accounting and Economics, 54, 1–18.CrossRefGoogle Scholar
  12. Choudhry, M. (2010). The repo handbook (2nd ed.). Oxford: Butterworth-Heinemann.Google Scholar
  13. Dechow, P., & Shakespeare, C. (2009). Do managers time securitization transactions to obtain accounting benefits? The Accounting Review, 84, 99–132.CrossRefGoogle Scholar
  14. Duffie, D., & Lando, D. (2001). Term-structures of credit spreads with incomplete accounting information. Econometrica, 69, 633–664.CrossRefGoogle Scholar
  15. Fama, E., & French, K. (1993). Common risk factors in the returns on stocks and bonds. Journal of Financial Economics, 33, 3–56.CrossRefGoogle Scholar
  16. Feltham, G., & Xie, J. (1994). Performance measure congruity and diversity in multi-task principal/agent relations. The Accounting Review, 69, 429–453.Google Scholar
  17. Furfine, C. (2000). Interbank payments and the daily federal funds rate. Journal of Monetary Economics, 46, 535–553.CrossRefGoogle Scholar
  18. Gallemore, J. (2013). Does bank opacity enable regulatory forbearance? Working paper.Google Scholar
  19. Gorton, G., & Metrick, A. (2012). Securitized banking and the run on repo. Journal of Financial Economics, 104(3), 425–451.CrossRefGoogle Scholar
  20. He, Z., & Xiong, W. (2012). Rollover risk and credit risk. Journal of Finance, 67, 391–429.CrossRefGoogle Scholar
  21. Hördahl, P., & King, M. (2008). Developments in repo markets during the financial turmoil. BIS quarterly review. Bank for International Settlements. December 2008, 37–53.Google Scholar
  22. Huizinga, H., & Laeven, L. (2012). Bank valuation and accounting discretion during a financial crisis. Journal of Financial Economics, 106, 614–634.CrossRefGoogle Scholar
  23. Jorion, P., & Zhang, G. (2007). Good and bad credit contagion: Evidence from credit default swaps. Journal of Financial Economics, 84, 860–883.CrossRefGoogle Scholar
  24. Kotomin, V., & Winters, D. (2006). Quarter-end effects in banks: Preferred habitat or window dressing? Journal of Financial Services Research, 29, 61–82.CrossRefGoogle Scholar
  25. Krishnamurthy, A., Nagel, S., & Orlov, D. (2014). Sizing up repo. Journal of Finance, 69, 2381–2417.CrossRefGoogle Scholar
  26. Lakonishok, J., Shleifer, A., Thaler, R., & Vishny, R. (1991). Window dressing by pension fund managers. American Economic Review (Papers and Proceedings), 81, 227–231.Google Scholar
  27. Lee, L. (2012). Incentives to inflate reported cash from operations using classification and timing. The Accounting Review, 87, 1–33.CrossRefGoogle Scholar
  28. Messier, W., Glover, S., & Prawitt, D. (2012). Auditing and assurance services: A systematic approach (8th ed.). New York: McGraw-Hill.Google Scholar
  29. Ng, L., & Wang, Q. (2004). Institutional trading and the turn-of-the-year effect. Journal of Financial Economics, 74, 343–366.CrossRefGoogle Scholar
  30. Ohlson, J., & Gao, Z. (2006). Earnings, earnings growth and value. Foundation and Trends in Accounting, 1, 1–70.CrossRefGoogle Scholar
  31. Petersen, M. (2009). Estimating standard errors in finance panel data sets: Comparing approaches. Review of Financial Studies, 22, 435–480.CrossRefGoogle Scholar
  32. Roychowdhury, S. (2006). Earnings management through real activities manipulation. Journal of Accounting and Economics, 42, 335–370.CrossRefGoogle Scholar
  33. Securities and Exchange Commission. (2010). Short-term borrowing disclosure. Release Nos. 33-9143; 34-62932; File No. S7-22-10.Google Scholar
  34. Shleifer, A., & Vishny, R. (2010). Unstable banking. Journal of Financial Economics, 97, 306–318.CrossRefGoogle Scholar
  35. Stigum, M. (2007). Stigum’s money market. New York: McGraw-Hill.Google Scholar
  36. Valukas, A. (2010, March). Examiner of United States Bankruptcy Court Southern district of New York. “In re Lehman Brothers Holdings Inc., et al., Debtors.” Chapter 11 Case No. 08-13555 (JMP).Google Scholar
  37. Whittington, R., & Pany, K. (2010). Principles of auditing & other assurance services (17th ed.). New York: McGraw-Hill.Google Scholar

Copyright information

© Springer Science+Business Media New York 2015

Authors and Affiliations

  1. 1.Goizueta Business SchoolEmory UniversityAtlantaUSA
  2. 2.Simon Business SchoolUniversity of RochesterRochesterUSA

Personalised recommendations