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Bank liquidity and the cost of debt

Author

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  • Miller, Sam

    (Bank of England)

  • Sowerbutts, Rhiannon

    (Bank of England)

Abstract

Since the 2007–09 crisis, tougher bank liquidity regulation has been imposed which aims to ensure banks can survive a severe funding stress. Critics of this regulation suggest that it raises the cost of maturity transformation and reduces productive lending. In this paper we build a bank run model with a unique equilibrium where solvent banks can fail due to illiquidity. We endogenise banks’ funding costs as a function of their liquid asset holdings and show how they are negatively related to liquidity, therefore offsetting some of the costs from higher liquidity requirements. We find evidence for this relationship using post-crisis data for US banks, implying that liquidity requirements may be less costly than previously thought.

Suggested Citation

  • Miller, Sam & Sowerbutts, Rhiannon, 2018. "Bank liquidity and the cost of debt," Bank of England working papers 707, Bank of England, revised 09 Oct 2018.
    • Handle: RePEc:boe:boeewp:0707
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    Citations

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    Cited by:

    1. Reinhardt, Dennis & Reynolds, Stephen & Sowerbutts, Rhiannon & van Hombeeck, Carlos, 2023. "Quality is our asset: The international transmission of liquidity regulation," Journal of Banking & Finance, Elsevier, vol. 154(C).
    2. Miller, Sam & Wanengkirtyo, Boromeus, 2020. "Liquidity and monetary transmission: a quasi-experimental approach," Bank of England working papers 891, Bank of England.
    3. 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.
    4. Xuefang Liu & W. Robert J. Alexander & Sajid Anwar, 2018. "Bank Runs in China: Evidence from a Dynamic Panel Model," Arthaniti: Journal of Economic Theory and Practice, , vol. 17(1), pages 15-30, June.
    5. Adi Mordel, 2018. "Prudential Liquidity Regulation in Banking-A Literature Review," Discussion Papers 18-8, Bank of Canada.

    More about this item

    Keywords

    Bank runs; global games; liquidity;
    All these keywords.

    JEL classification:

    • 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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