Banks’ asset and liability valuation in the new regulatory environment: a game theory perspective

Article

Abstract

In the aftermath of the global financial crisis, US regulators have required banks to disclose more details regarding the valuation techniques of their traded assets and liabilities. Using data from 2013 to 2014 annual reports for nine primary dealers, we examine the determinants of the choice of the valuation techniques in a game theory setup. Consistent with their publicly disclosed shareholder policy, we assume that the banks’ objective is to maximize their return on equity. Our key findings are threefold. First, we show that the optimal strategy for the global systemically important banks (G-SIBs) is to select the valuation techniques associated with a lower level of risk. Conversely, the optimal strategy for the non-G-SIBs is to select the valuation techniques associated with a higher level of risk. Finally, we demonstrate that the above optimal strategies are consistent over time. These findings are in line with the regulators’ mindset to reduce the balance sheet riskiness of G-SIBs.

Keywords

Great recession Game theory Global systemically important banks Return on equity Valuation techniques 

JEL Classification

C72 D78 G11 G23 G24 G28 

References

  1. 1.
    Miele, M.G., and E. Sales. 2011. The final crisis and regulation reform. Journal of Banking Regulation. 12: 277–307.CrossRefGoogle Scholar
  2. 2.
    Yuksel, M. 2014. Identifying global systemically important banks. Australia: Reserve Bank of Australia. Bulletin December Quarter 2014.Google Scholar
  3. 3.
    Moshirian, F. 2012. The future and dynamics of global systemically important banks. Journal of Banking & Finance. 36: 2675–2679.CrossRefGoogle Scholar
  4. 4.
    Moshirian, F. 2011. The global financial crisis and the evolution of markets, institutions and regulation. Journal of banking & Finance. 35: 502–511.CrossRefGoogle Scholar
  5. 5.
    Arnold, B., C. Borio, L. Ellis, and F. Moshirian. 2012. Systemic risk, macroprudential policy frameworks, monitoring financial. Journal of Banking & Finance. 36: 3125–3132.CrossRefGoogle Scholar
  6. 6.
    Gao, Y., S. Liao, and X. Wang. 2016. Capital markets’ assessment of the economic impact of the Dodd–Frank Act on systemically important financial firms. Journal of Banking & Finance. doi:10.1016/j.jbankfin.2016.03.016.
  7. 7.
    Moenninghoff, S.C., S. Ongena, and A. Wieandt. 2015. The perennial challenge to counter too-big-to-fail in banking: Empirical evidence from the new international regulation dealing with Global Systemically Important Banks. Journal of Banking & Finance. 61: 221–236.CrossRefGoogle Scholar
  8. 8.
    U.S. Securities and Exchange Commission. 2008. Sample letter sent to public companies on MD&A disclosure regarding the application of SFAS 157 (fair value measurements). SEC, September 2008, https://www.sec.gov/divisions/corpfin/guidance/fairvalueltr0908.htm.
  9. 9.
    Financial Accounting Standards Board. 2011. Fair value measurement (topic 820): Amendments to achieve common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs. Norwalk, CT: Financial Accounting Standards Board of the Financial Accounting Society. Financial Accounting Series, No. 2011-04.Google Scholar
  10. 10.
    Financial Accounting Standards Board (FASB). 2015. http://www.fasb.org/jsp/FASB/FASBContent_C/ActionAlertPage&cid=1176165846896.
  11. 11.
    Financial Accounting Standards Board. 2015. Notes to Financial Statements (Topic 235): Assessing whether disclosures are material. Norwalk, CT: Financial Accounting Standards Board of the Financial Accounting Society. Exposure Draft. Issued: September 24, 2015. Comments due: December 8, 2015. http://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1176166402325&acceptedDisclaimer=true.
  12. 12.
    Nash, J. 1951. Non-cooperative games. The Annals of Mathematics. 54 (2): 286–295.CrossRefGoogle Scholar
  13. 13.
    Financial Stability Board (FSB). 2013. http://www.fsb.org/2013/11/r_131111/.
  14. 14.
    Slovik, P. 2012 Systemically important banks and capital regulation challenges. OECD Economics Department Working Papers (No. 916).Google Scholar
  15. 15.
    Basel Committee on Banking Supervision. 2013. Global systemically important banks: Updated assessment methodology and the higher loss absorbency requirements. Rules text.Google Scholar
  16. 16.
    Gibbons, R. 1992. Game theory for applied economists. Princeton: Princeton University Press.Google Scholar
  17. 17.
    Federal Reserve Bank of New York. 2013. Federal Reserve Bank of New York. https://www.newyorkfed.org/markets/pridealers_current.html.

Copyright information

© Macmillan Publishers Ltd 2017

Authors and Affiliations

  1. 1.Department of Economics and FinanceManhattan CollegeNew YorkUSA
  2. 2.Department of ManagementNYU Abu DhabiAbu DhabiUAE

Personalised recommendations