Banks as Regulated Traders

Abstract

This paper uses detailed high-frequency regulatory data to evaluate whether trading increases or decreases systemic risk in the U.S. banking sector. We estimate the sensitivity of weekly bank trading net profits to a variety of aggregate risk factors, which include equities, fixed-income, derivatives, foreign exchange, and commodities. We find that U.S. banks had large trading exposures to equity market risk before the introduction of the Volcker Rule in 2014 and that they curtailed these exposures afterwards. Pre-rule equity risk exposures were large across the board of the main asset classes, including fixed-income. There is also evidence of smaller exposures to credit and currency risk. We corroborate the main finding on equity risk with a quasi-natural experiment that exploits the phased-in introduction of reporting requirements to refine identification, and an optimal changepoint regression that estimates time-varying exposures to address rebalancing. A stress-test calibration indicates that the Volcker Rule was an effective financial-stability regulation, as even a 5% drop in stock market returns would have led to material aggregate trading losses for banks in the pre-Volcker period, as large as about 3% (1.5%) of sector-wide market risk weighted assets (tier 1 capital).

The Saving Glut of the Rich

“…This figure decomposes the holdings of household debt by the U.S. household sector across the wealth distribution. The left panel uses the financial asset shares from Saez and Zucman (2016) and the right panel uses the financial asset shares from the DFA (described in Batty et al (2019)). All series are scaled by national income.…”

“…Related literature. Several studies have detailed the evolution of wealth inequality in the United States (e.g., Saez and Zucman (2016), Wolff (2017), Bricker et al (2018), Batty et al (2019), Kuhn et al (2019), and Smith et al (2019b)). This study is the first to our knowledge to focus on the holdings of household debt as a financial asset by the wealthy.…”

Monetary Policy, Redistribution, and Risk Premia

“…Third, we aggregate over the net position in nominal claims across sectors implied by Tables A.4 and A.5, accounting for the major discrepancies in measuring household wealth between the SCF and FA. Batty, Bricker, Briggs, Holmquist, McIntosh, Moore, Nielsen, Reber, Shatto, Sommer, Sweeney, and Volz (2019) provide an exhaustive accounting of these discrepancies. Aside from the exclusion of DB pensions in the SCF (which we have already addressed), the two other largest sources of discrepancy are in time deposits and short-term investment assets and in wealth in noncorporate businesses.…”

“…Aside from the exclusion of DB pensions in the SCF (which we have already addressed), the two other largest sources of discrepancy are in time deposits and short-term investment assets and in wealth in noncorporate businesses. Following Batty et al (2019), in Table A.6 we adjust the aggregate household position in nominal claims to be consistent with the FA along each of these dimensions:…”

Lifecycle Patterns of Saving and Wealth Accumulation

“…That appendix is largely based on the work of Dettling et al (2015), but see all also Bricker et al (2016). Batty et al (2019) describes the new Distributional Financial Accounts (DFA)-also based on reconciled SCF and FA balance sheets-now published quarterly by the Federal Reserve Board. 14 The SCF field period generally runs four quarters starting in the second quarter of the survey year, The connected squares line segments show the entire SCF field period, and helps add perspective about how much the FA values being compared can change while the SCF is in the field.…”