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The Impact of the LCR on the Interbank Money Market

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Author Info

  • Bonner, C.
  • Eijffinger, S.C.W.

    (Tilburg University, Center for Economic Research)

Abstract

Abstract: This paper analyses the impact of the Basel 3 Liquidity Coverage Ratio (LCR) on the unsecured interbank money market and therefore on the implementation of monetary policy. Combining two unique datasets, we show that banks which are just above/below their short-term regulatory liquidity requirement pay and charge higher interest rates for unsecured interbank loans. The effect is larger for longer maturities and increases after the failure of Lehman Brothers. During a crisis, being close to the minimum liquidity requirement induces banks to decrease lending volumes. Given the high importance of a well-functioning interbank money market, our results suggest that the current design of the LCR is likely to dampen the effectiveness of monetary policy.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2012-075.

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Date of creation: 2012
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Handle: RePEc:dgr:kubcen:2012075

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Web page: http://center.uvt.nl

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Keywords: Monetary Policy; Interbank Market; Basel 3;

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References

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  1. de Haan, Leo & van den End, Jan Willem, 2013. "Bank liquidity, the maturity ladder, and regulation," Journal of Banking & Finance, Elsevier, vol. 37(10), pages 3930-3950.
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  8. Ulrich Bindseil & Jeroen Lamoot, 2011. "The Basel III framework for liquidity standards and monetary policy implementation," SFB 649 Discussion Papers SFB649DP2011-041, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  9. Tobias Adrian & Hyun Song Shin, 2008. "Liquidity and leverage," Staff Reports 328, Federal Reserve Bank of New York.
  10. Q. Farooq Akram & Casper Christophersen, 2010. "Interbank overnight interest rates - gains from systemic importance," Working Paper 2010/11, Norges Bank.
  11. Stefan W. Schmitz, 2013. "The Impact of the Liquidity Coverage Ratio (LCR) on the Implementation of Monetary Policy," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 42(2), pages 135-170, 07.
  12. Eduardo Jallath-Coria & Tridas Mukhopadhyay & Amir Yaron, 2002. "How Well Do Banks Manage Their Reserves?," NBER Working Papers 9388, National Bureau of Economic Research, Inc.
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Cited by:
  1. Kurmas Akdogan & Burcu Deniz Yildirim, 2014. "Non-core Liabilities as an Indicator of Systemic Risk and a Liquidity Stress Test Application on Turkish Banking System," Working Papers 1412, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
  2. Morten L Bech & Cyril Monnet, 2013. "The Impact of Unconventional Monetary Policy on the Overnight Interbank Market," RBA Annual Conference Volume, in: Alexandra Heath & Matthew Lilley & Mark Manning (ed.), Liquidity and Funding Markets Reserve Bank of Australia.

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