Analyzing Bank Investment Portfolios: Economic and Regulatory Factors

Part 1: Ask the right questions

Part 1: Ask the right questions 

Professionals with an analytics mindset need to develop a strong understanding of the economic and institutional factors that influence the data they are analyzing. They allow that understanding to guide their analysis and interpretation of the data. In this section of the case, we consider the economic, accounting and regulatory factors that could potentially influence banks’ investment decisions. We use our understanding of those factors to guide and develop expectations for our data analysis in Part 2 of the case. 

Required 

As detailed above, many banks expressed concern about including unrealized gains and losses on AFS securities in the calculation of regulatory capital. The Federal Reserve Board noted: “Generally, the [banks] asserted that the proposal would introduce significant volatility in banking organizations’ capital ratios due in large part to fluctuations in benchmark interest rates.”4 Answer the following questions related to these concerns: 

1.Describe the relationship between a bond investment’s coupon rate, face value, market interest rate and market price. 

2.At the time of the proposal, do you think banks expected interest rates to increase or decrease from then (2012–13) to the present day? How would this increase or decrease in interest rates affect the fair value of banks’ debt investment portfolios? 

3.Explain why banks do not want increased volatility in their regulatory capital. 

4.According to the FASB, how should banks decide whether to classify a given debt 

investment as trading, AFS or HTM? Do you think banks use significant judgment in this classification decision? Explain why or why not. 

5.If a bank wants to avoid volatility in its regulatory capital, which investment  classification would be the most desirable, and which investment classifications would be the least desirable? Does your answer differ depending on whether the bank is large or small? 

6.Once a bank chooses to classify a given investment as HTM, can it subsequently change that classification? What are the potential consequences of selling an HTM investment before maturity in order to meet liquidity needs or to meet regulatory capital requirements? 

7.Explain how you would expect banks’ debt investment portfolios to change over the  time period you are examining in this case (2009–18). 

Part 2 : Analytics mindset Bank investment portfolios 

Extract, transform and load relevant data and apply appropriate data analytics techniques 

In this part of the case, you will load your data into Tableau for analysis (your data has already been extracted and transformed for you). You will also apply appropriate data analytics techniques to your data. 

Required 

Load the data from Analytics_mindset_case_studies_Bank_Investment_Portfolio.xlsx into Tableau or use Excel to answer the following questions.  

1.Develop a data visualizations that provide an analysis of the following: – 

How the average amount of HTM investments held, as well as how the average amount of AFS investments held, has changed during the sample period. 

a.Perform this analysis for all banks and then separately for large banks and for small banks. 

b.Show each analysis separately.

3.Include trend lines. 

2.Develop a data visualizations that provide an analysis of the 

following: – How the composition of banks’ investment portfolios has changed during the sample period. In particular, how the percentage of AFS and HTM investments that banks have classified as HTM (i.e., HTM percentage) has changed during the sample period. 

a.Show the analysis separately for all banks and together for large banks and small banks. Use different colors for each bank population if possible in Excel.  

b.Include trend lines. 

3.You have been asked to prepare an oral or written presentation (as directed by your instructor), accompanied by the visualizations you have prepared for the Federal Reserve Board to help board members answer the following questions: 

1. What are the trends in the average amount of HTM and AFS investments held during the sample period? 

2. What are the trends in the composition of banks’ investment portfolios during the sample period? In particular, how did the average HTM percentage change during the sample period? 

3. What are the trends at the individual bank level in the change in the HTM percentage of investments held for large banks from 2013 to 2018 (the period after which the change in regulation took place)?