Finance Department's Lecture

Theme：Banks as Regulated Traders

Speaker：Filip Zikes

Time：2019-12-10 10:00

Address：Room 404, Mingde Business Building

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).

Short Bio：

Dr. Filip Zikes is a Principal Economist in the Division of Financial Stability at the Federal Reserve Board of Governors. Prior to joining the Board, Filip worked as a Senior Economist at the Bank of England. His research interests are in the area of empirical market microstructure, interconnectedness of financial systems, and financial econometrics. Filip holds a PhD from Imperial College London.