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The Effects of Liquidity Regulation on Bank Assets and Liabilities

Author

Listed:
  • Patty Duijm

    (De Nederlandsche Bank)

  • Peter Wierts

    (VU University)

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.

Suggested Citation

  • Patty Duijm & Peter Wierts, 2016. "The Effects of Liquidity Regulation on Bank Assets and Liabilities," International Journal of Central Banking, International Journal of Central Banking, vol. 12(2), pages 385-411, June.
    • Handle: RePEc:ijc:ijcjou:y:2016:q:2:a:9
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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