The Effects of Liquidity Regulation on Bank Assets and Liabilities
International Journal of Central Banking (IJCB), 2016
27 Pages Posted: 24 Jul 2017
Date Written: June 1, 2016
Abstract
Under Basel III rules, banks became subject to a liquidity coverage ratio (LCR) from 2015 onward, to promote short-term resilience. Investigating the effects of such liquidity regulation on bank balance sheets, we find (i) cointegration of liquid assets and liabilities, to maintain a short-term liquidity buffer; and (ii) that adjustment in the liquidity ratio is skewed towards the liability side. This finding contrasts with established wisdom that compliance with the LCR is mainly driven by changes in liquid assets. Moreover, microprudential regulation has not prevented a procyclical liquidity cycle in secured financing that is strongly correlated with leverage.
JEL Classification: E44, G21, G28
Suggested Citation: Suggested Citation