Abstract
We examine economic consequences of US bank regulators' phased removal of the prudential filter for accumulated other comprehensive income for advanced approaches banks beginning on January 1, 2014. The primary effect of the AOCI filter is to exclude unrealized gains and losses on available-for-sale securities from banks' regulatory capital. We predict and find that, to mitigate the regulatory capital volatility resulting from the AOCI filter removal, advanced approaches banks increased the proportion of investment securities they classified as held to maturity, thereby limiting their financing/liquidity and interest-rate-risk management options, and they shifted their investment security holdings into safer types of securities, thereby reducing their interest rate spread. We further predict and find that these banks borrow more under securities repurchase agreements potentially collateralized by held-to-maturity securities and reduce loan supply owing to their reduced financing options, and that they invest in riskier loans to increase their interest rate spread.