The Impact of Liquidity Regulation on Interbank Money Markets
AbstractThis paper analyzes the impact of a liquidity requirement similar to the Basel III Liquidity Coverage Ratio (LCR) on the interbank money market and monetary policy implementation. By combining two unique datasets of Dutch banks from 2004 to 2011, we show that non-compliance with a liquidity requirement causes banks to pay and charge higher interest rates for loans with maturities longer than the requirement’s 30 day horizon. With respect to volumes, our analysis reveals that banks with a liquidity deficiency increase borrowing and decrease lending of long-term loans. Short-term loans seem to be unaffected by a liquidity requirement. A key takeaway from our analysis is that as long as only a small share of banks is non-compliant with the liquidity requirement, monetary policy implementation is likely to be unaffected. As soon as there is an aggregate shortage, central banks should consider using the interbank term rate as (additional) target for monetary policy implementation.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9124.
Date of creation: Sep 2012
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Find related papers by JEL classification:
- E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
- G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-09-22 (All new papers)
- NEP-BAN-2012-09-22 (Banking)
- NEP-CBA-2012-09-22 (Central Banking)
- NEP-MAC-2012-09-22 (Macroeconomics)
- NEP-MON-2012-09-22 (Monetary Economics)
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- Morten L. Bech & Todd Keister, 2013. "Liquidity regulation and the implementation of monetary policy," BIS Working Papers 432, Bank for International Settlements.
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