In Depth

Impact of Regulatory Changes on U.S. Bank Investment Portfolios​

In this paper we extend an analytical framework developed by PIMCO to incorporate recent regulations (including Basel III capital rules, liquidity rules and CCAR scenarios) into the portfolio optimization problem for U.S. banks. We apply this methodology on three representative bank portfolios, roughly corresponding to the largest U.S. banks, the super-regional banks and the regional/community banks. We model and discuss the regulatory constraints, and measure the effects of these regulations on their attainable efficient frontiers and asset allocations. In particular, regulatory charges are estimated using security level characteristics and simulations based on quarterly bank holding company reports. The results indicate Basel III and CCAR pose an implicit cost on the U.S. banking industry of over 4 billion dollars per year in foregone investment portfolio returns; moreover our estimates also show that the banks can potentially increase their investment portfolio returns by 3.3 billion dollars through moderate adjustment to their portfolios. We find that portfolio recommendations are similar across banks in terms of asset classes, although the magnitude of the reallocations and associated risk/return profiles vary across banks.

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