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The Impact of the LCR on the Interbank Money Market

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  • Clemens Bonner
  • Sylvester Eijffinger

Abstract

This paper analyzes the impact of a liquidity requirement similar to 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 of Dutch banks from 2005 to 2011, 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 maturities longer than the liquidity requirement's 30 day horizon. Being close to the minimum liquidity requirement induces banks to increase borrowing volumes in general while it only decreases lending volumes for maturities longer than 30 days. These results also hold when controlling for an institution's riskiness, the solvency of its counterparts, relationship-lending and period-specific effects.

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Bibliographic Info

Paper provided by Netherlands Central Bank, Research Department in its series DNB Working Papers with number 364.

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Date of creation: Dec 2012
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Handle: RePEc:dnb:dnbwpp:364

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Keywords: Monetary Policy; Liquidity; Interbank Market; Basel 3;

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References

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  1. Selva Demiralp & Brian Preslopsky & William Whitesell, 2004. "Overnight interbank loan markets," Finance and Economics Discussion Series 2004-29, Board of Governors of the Federal Reserve System (U.S.).
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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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