Raymond Kim, Ph.D.

Hedging Securities and Silicon Valley Bank Idiosyncrasies

Journal of Futures Markets, 2024

European Banking Authority Workshop 2023, Derivatives Markets Conference 2023, Korea Joint International Conference on Finance 2023, Temple University Brownbag Series 2024, Southwestern Finance Association 2024, Eastern Finance Association 2024, Financial Management Association 2024

Abstract: Hedging requires adequacy and timing. This paper finds that banks did not systematically ignore balance sheet risks like Silicon Valley Bank, and instead exercised risk management by asymmetrically increasing hedging activity when security losses increase and scaling back hedging activity as security losses reverse. Banks also hedge against bank runs when risk increases due to a combination of security losses and funding risks from unsecured deposits. Findings suggest Silicon Valley Bank’s mistakes are idiosyncratic. Results suggest that non-stress test banks target balance-sheet risks when hedging, stabilizing themselves from interest rate shocks transmitted through fixed-income securities. Scrutiny of rules-based outliers like SVB is preferable to increased regulatory burden for all non-stress test banks.

The Disproportionate Costs of Uncertainty: Evidence from Dodd-Frank and Small Banks

Journal of Futures Markets, 2021

Southern Finance Association 2018, Derivative Markets Conference 2019

Abstract: Uncertainty in banking regulation may impose widespread economic costs by increasing financial constraints on credit availability. Four years of Dodd-Frank uncertainty over undecided risk weightings increased regulatory uncertainty for smaller banks, restricting “vanilla” interest rate hedging activities. This paper uses newly reported mortgage banking data as an identification strategy and finds that when costs of uncertainty are removed, small banks hedge 97%–120% more interest rate risk while mortgage securitization income increases by 65.2% compared to large banks. These findings support the need for tailored regulations that consider the higher costs of regulatory uncertainty for smaller banks.

Page updated

Google Sites

Report abuse