Online Appendix for 'Accounting Rule–Driven Regulatory Capital Management and its Real Effects for U.S. Life Insurers'

Based on a large sample of publicly listed and non-listed US commercial banks from 1996 to 2011, we find robust evidence consistent with banks using realized available for sale (AFS) securities gains and losses to smooth earnings and increase low regulatory capital. We also find that (i) banks with positive earnings smooth earnings, and banks with negative earnings generally take big baths; (ii) regulatory capital constrains big baths; (iii) banks with more negative earnings and more unrealized beginning-of-quarter losses (gains) take big baths (smooth earnings); and (iv) banks with low regulatory capital and more unrealized gains realize more gains. Also, banks with negative earnings tak big baths (avoid or reduce the earnings loss) if their unrealized gains are insufficient (sufficient) to offset the negative earnings. Our inferences apply to listed and non-listed banks, which indicates that the earnings management incentives do not derive solely from public capital markets. Our findings reveal that the accounting for AFS securities gains and losses enables banks to manage regulatory capital and earnings in a variety of ways.

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What's Wrong with Annuity Markets?

Finance and Economics Discussion Series ◽

10.17016/feds.2021.044 ◽

2021 ◽

Vol 2021 (044) ◽

pp. 1-69

Author(s):

Stéphane Verani ◽

◽

Pei Cheng Yu ◽

Keyword(s):

Interest Rate ◽

Interest Rate Risk ◽

Capital Requirements ◽

Regulatory Capital ◽

Life Insurers ◽

Rate Risk ◽

Interest Rate Risk Management ◽

Rate Environment ◽

Life Annuities ◽

The Cost

We show that the supply of life annuities in the U.S. is constrained by interest rate risk. We identify this effect using annuity prices offered by U.S. life insurers from 1989 to 2019 and exogenous variations in contract-level regulatory capital requirements. The cost of interest rate risk management accounts for at least half of the average life annuity markups or eight per- centage points. The contribution of interest rate risk to annuity markups sharply increased after the great financial crisis, suggesting new retirees' opportunities to transfer their longevity risk are unlikely to improve in a persistently low interest rate environment.

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