Liquidity Regulation, Funding Costs and Corporate Lending
AbstractThis paper analyzes the impact of a liquidity requirement similar to the Basel 3 Liquidity Coverage Ratio (LCR) on banks' funding costs and corporate lending rates. Using a dataset of 26 Dutch banks from January 2008 to December 2011, I find that banks which are just above/below their quantitative liquidity requirement do not charge higher interest rates for corporate lending. This effect is caused by banks being not able to pass on their increased funding costs in the interbank market to private sector clients, implying that banks do not have pricing power. The results are robust to including demand effects, solvency and loan characteristics. The analysis in this paper suggests that the current design of the LCR is unlikely to have a major impact on corporate lending rates.
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Bibliographic InfoPaper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 361.
Date of creation: Dec 2012
Date of revision:
Monetary transmission mechanism; Liquidity; Basel 3; Lending; Interest Rate;
Find related papers by JEL classification:
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
- E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
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