Working Paper Revision

Banks as Regulated Traders

Abstract: Banks use trading as a vehicle to take risk. Using unique high-frequency regulatory data, we estimate the sensitivity of weekly bank trading profits to aggregate equity, fixed-income, credit, currency and commodity risk factors. Our estimates imply that U.S. banks had large trading exposures to equity market risk before the Volcker Rule, which they curtailed afterwards. They also have exposures to credit and currency risk. The results hold up in a quasi-natural experimental design that exploits the phased-in introduction of reporting requirements to address identification. Heterogeneity and placebo tests further corroborate the results. Counterfactual stress-test analyses quantify the financial stability implications.

Keywords: Bank trading; Regulation; risk exposures; Systemic risk;

JEL Classification: G21; G32; G38;

https://doi.org/10.17016/FEDS.2019.005r1

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2021-08-04

Number: 2019-005r1

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• Working Paper Revision: Banks as Regulated Traders