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Determinants of Banks’ Liquidity: a French Perspective on Interactions between Market and Regulatory Requirements
[Les déterminants de la liquidité bancaire : une perspective française sur les interactions entre les exigences du marché et les exigences réglementaires]

Author

Listed:
  • Olivier de Bandt
  • Sandrine Lecarpentier
  • Cyril Pouvelle

Abstract

The paper investigates the impact of solvency and liquidity regulation on banks' balance sheet structure. The Covid-19 pandemics shows that periods of sharp increase in risk aversion often result in liquidity strains for banks due to the volatility of long-term funding markets (both money and bond funding markets). According to a simple portfolio allocation model banks’ liquidity increases when the regulatory constraint is binding. We provide evidence, using the “liquidity coefficient” implemented in France ahead of Basel III's Liquidity Coverage Ratio, of a positive effect of the solvency ratio on the liquidity coefficient. We also show that in times of crisis, measured by financial variables, French banks actually decreased the liquidity coefficient, with the transmission channel materialising mainly on the liability side. Ce papier examine l’impact de la réglementation du capital et de la liquidité sur la structure des bilans bancaires. La pandémie de Covid-19 montre que les périodes d'augmentation brutale de l'aversion pour le risque occasionnent souvent des problèmes de liquidité pour les banques en raison de la volatilité des marchés de financement à long terme (aussi bien pour les marchés monétaires qu’obligataires). D’après un modèle simple d’allocation de portefeuille, la liquidité bancaire augmente lorsque la norme réglementaire est contraignante. Nous montrons un effet positif du ratio de solvabilité sur la liquidité, en utilisant le "coefficient de liquidité" appliqué en France avant le Ratio de Couverture de Liquidité (LCR) de Bâle 3. Nous montrons également qu’en temps de crise, mesurée par des variables financières, les banques françaises ont en fait décru leur coefficient de liquidité, le canal de transmission se matérialisant principalement du côté du passif.

Suggested Citation

  • Olivier de Bandt & Sandrine Lecarpentier & Cyril Pouvelle, 2020. "Determinants of Banks’ Liquidity: a French Perspective on Interactions between Market and Regulatory Requirements [Les déterminants de la liquidité bancaire : une perspective française sur les inte," Débats économiques et financiers 35, Banque de France.
    • Handle: RePEc:bfr:decfin:35
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    2. Cyril Pouvelle., 2022. "An Analysis of Financial Conglomerate Resilience: A Perspective on bancassurance in France [Une analyse de la résilience des conglomérats financiers : Une perspective sur la bancassurance en France," Débats économiques et financiers 39, Banque de France.
    3. Monnet, Eric & , & Ungaro, Stefano, 2021. "The Real Effects of Bank Runs. Evidence from the French Great Depression (1930-1931)," CEPR Discussion Papers 16054, C.E.P.R. Discussion Papers.
    4. Hibiki Ichiue & Jean-Guillaume Sahuc & Yasin Mimir & Jolan Mohimont & Kalin Nikolov & Olivier de Bandt & Sigrid Roehrs & Valério Scalone & Michael Straughan & Bora Durdu, 2022. "Assessing the Impact of Basel III: Evidence from Structural Macroeconomic Models," Working Papers hal-04159816, HAL.
    5. Vo, Quynh-Anh, 2021. "Interactions of capital and liquidity requirements: a review of the literature," Bank of England working papers 916, Bank of England.
    6. Ananou, Foly & Chronopoulos, Dimitris K. & Tarazi, Amine & Wilson, John O.S., 2021. "Liquidity regulation and bank lending," Journal of Corporate Finance, Elsevier, vol. 69(C).
    7. Xuanling MA & Meng JI, 2023. "Analysis on Liquidity Risk Management of Monetary and Financial Services based on the Goal of Financial Stability," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 72-91, June.

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    More about this item

    Keywords

    Bank Capital Regulation; Bank Liquidity Regulation; Basel III; stress tests;
    All these keywords.

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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