Are banks’ below-par own debt repurchases a cause for prudential concern?

Lubberink, Martien and Renders, Annelies (2017): Are banks’ below-par own debt repurchases a cause for prudential concern?

Abstract

Leading up to the implementation of Basel III, European banks repurchased debt securities that traded below par. Banks are subjected to a prudential filter that excludes unrealized gains on liabili- ties from changes in own credit standing from the calculation of capital ratios. By repurchasing debt securities below par, unrealized gains become realized and increase Core Tier 1 capital. Using data of 720 European Liability Management Exercises (LMEs) conducted between April 2009 and De- cember 2013, we show that poorly capitalized banks repurchased securities and lost about 9.1bn euro in premiums to compensate debt holders. Banks also repurchased the most loss-absorbing securities, for which they paid the highest premiums. These premiums increase with leverage and in times of stress. Hence debt repurchases are a cause for prudential concern.

• Item Type: MPRA Paper
• Language: English
• Keywords: Banking, repurchases, subordinated debt.
• Subjects: E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages; G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation; G - Financial Economics > G3 - Corporate Finance and Governance > G32 - Financing Policy ; Financial Risk and Risk Management ; Capital and Ownership Structure ; Value of Firms ; Goodwill; G - Financial Economics > G3 - Corporate Finance and Governance > G35 - Payout Policy; M - Business Administration and Business Economics ; Marketing ; Accounting ; Personnel Economics > M4 - Accounting and Auditing > M41 - Accounting

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