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Liquidity Regulation, Funding Costs and Corporate Lending

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  • Clemens Bonner

Abstract

This 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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File URL: http://www.dnb.nl/en/binaries/Working%20Paper%20361_tcm47-283047.pdf
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Bibliographic Info

Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 361.

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Date of creation: Dec 2012
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Handle: RePEc:dnb:dnbwpp:361

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Keywords: Monetary transmission mechanism; Liquidity; Basel 3; Lending; Interest Rate;

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