A Faculty and Undergraduate Student Collaboration: Are Banks’ Changes in Held-to-Maturity Securities Related to Incoming Capital Requirements?

Abstract

This research paper represents the culmination of a joint faculty and undergraduate student
collaboration that addresses comments in the financial press asserting banks are categorizing a greater percentage of their debt investments as held-to-maturity (HTM) rather than available-for-sale (AFS) in preparation of the Basel III Accord regulations. If a decline in the market values of AFS securities is anticipated, then banks will be more inclined to categorize their debt investments as HTM to avoid decreases to their capital ratios. An alternative explanation is that banks are increasing their liquidity in response to the tightening of monetary policy. Results support the alternative explanation.