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.
Authors
- Patty Duijm
- Peter Wierts
JEL codes
- E44
- G21
- G28