Repo transactions and bank risk
In a research study from Edward Owens, assistant professor of accounting, and Joanna Shuang Wu (U of Rochester), the authors examine bank reporting of short-term borrowings in the repo market. Repo borrowings, otherwise known as sale and repurchase agreements, are essentially collateralized loans known for their short-term nature. The authors note that repo borrowings are typically associated with risky trading behavior, especially due to their opaque nature and role in the recent financial crisis. Owens and Wu found that current financial reporting requirements for banks might not adequately capture a full accounting of the risks associated with a bank’s repo liabilities. Specifically, end-of-quarter balance sheets may not correctly show the risk levels from repo borrowings exhibited throughout the quarter. The researchers analyzed quarter-end deviations in bank repo borrowings to better study the risk they represent. The primary research sample for the study was pulled from “13,548 bank-quarter observations across 573 unique publicly traded bank holding companies.” The authors attribute some of the deviation to what is termed “window dressing,” a step banks might take “to temporarily reduce the reported level of repo borrowings around quarter-end reporting dates.” Expected fluctuations in bank depositor and borrower activity around the end of the quarter did factor into the deviation as well.