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June 2016 issue
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Bover, Schürz, Slacalek, Teppa
Le Blanc, Porpiglia, Teppa, Zhu, Ziegelmeyer
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Beck, Wagner
Casiraghi, Gaiotti, Rodano, Secchi
Aizenman, Binici, Hutchison
Bragoli, Rigon, Zanetti
Duijm, Wierts
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The Effects of Liquidity Regulation on Bank Assets and Liabilities

by Patty Duijma and Peter Wiertsa, b

Abstract

Under Basel III rules, banks became subject to a liquidity coverage ratio (LCR) from 2015 onward, to promote shortterm resilience. Investigating the effects of such liquidity regulation on bank balance sheets, we find (i) cointegration of liquid assets and liabilities, to maintain a minimum 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 Codes: E44, G21, G28.

 
Full article (PDF, 27 pages, 1617 kb)


a De Nederlandsche Bank
b VU University