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Market Reaction to Bank Liquidity Regulation

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  • Bruno, Brunella
  • Onali, Enrico
  • Schaeck, Klaus

Abstract

We measure market reactions to announcements concerning liquidity regulation, a key innovation in the Basel framework. Our initial results show that liquidity regulation attracts negative abnormal returns. However, the price responses are less pronounced when coinciding announcements concerning capital regulation are backed out, suggesting that markets do not consider liquidity regulation to be binding. Bank- and country-specific characteristics also matter. Liquid balance sheets and high charter values increase abnormal returns whereas smaller long-term funding mismatches reduce abnormal returns. Banks located in countries with large government debt and tight interbank conditions or with prior domestic liquidity regulation display lower abnormal returns.

Suggested Citation

  • Bruno, Brunella & Onali, Enrico & Schaeck, Klaus, 2018. "Market Reaction to Bank Liquidity Regulation," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 53(2), pages 899-935, April.
    • Handle: RePEc:cup:jfinqa:v:53:y:2018:i:02:p:899-935_00
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    Cited by:

    1. Patel, Ajay & Sorokina, Nonna & Thornton, John H., 2022. "Liquidity and bank capital structure," Journal of Financial Stability, Elsevier, vol. 62(C).
    2. Pancotto, Livia & ap Gwilym, Owain & Molyneux, Philip, 2023. "Deal! Market reactions to the agreement on the EU Covid-19 recovery fund," Journal of Financial Stability, Elsevier, vol. 67(C).
    3. Zhou, Tim, 2015. "Failed bank auctions and externalities," MPRA Paper 65587, University Library of Munich, Germany.
    4. Cardillo, Giovanni & Onali, Enrico & Torluccio, Giuseppe, 2021. "Does gender diversity on banks' boards matter? Evidence from public bailouts," Journal of Corporate Finance, Elsevier, vol. 71(C).
    5. Guillaume Arnould & Benjamin Guin & Steven Ongena & Paolo Siciliani, 2020. "(When) Do Banks React to Anticipated Capital Reliefs?," Swiss Finance Institute Research Paper Series 20-113, Swiss Finance Institute.
    6. Yiannis Anagnostopoulos & Jackie Kabeega, 2019. "Insider perspectives on European banking challenges in the post-crisis regulation environment," Journal of Banking Regulation, Palgrave Macmillan, vol. 20(2), pages 136-158, June.
    7. John Pereira & Irma Malafronte & Ghulam Sorwar & Mohamed Nurullah, 2019. "Enforcement Actions, Market Movement and Depositors’ Reaction: Evidence from the US Banking System," Journal of Financial Services Research, Springer;Western Finance Association, vol. 55(2), pages 143-165, June.
    8. Harris, Richard & Karadotchev, Veselin & Sowerbutts, Rhiannon & Stoja, Evarist, 2019. "Have FSRs got news for you? Evidence from the impact of Financial Stability Reports on market activity," Bank of England working papers 792, Bank of England.
    9. Muhammad Saifuddin Khan, 2018. "The Role of Liquidity in Financial Intermediation," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 1-2018.
    10. Zheng, Chen & Cheung, Adrian Wai Kong & Cronje, Tom, 2022. "Social capital and bank liquidity hoarding," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 80(C).
    11. Tim M. Zhou, 2023. "Auctions of failed banks: an analysis of losing bidders," Review of Quantitative Finance and Accounting, Springer, vol. 61(1), pages 155-176, July.
    12. Salvatore Perdichizzi & Matteo Cotugno & Giuseppe Torluccio, 2022. "Is the ECB’s conventional monetary policy state‐dependent? An event study approach," Manchester School, University of Manchester, vol. 90(2), pages 213-236, March.
    13. Carboni, Marika & Fiordelisi, Franco & Ricci, Ornella & Lopes, Francesco Saverio Stentella, 2017. "Surprised or not surprised? The investors’ reaction to the comprehensive assessment preceding the launch of the banking union," Journal of Banking & Finance, Elsevier, vol. 74(C), pages 122-132.
    14. Raz, Arisyi F. & McGowan, Danny & Zhao, Tianshu, 2022. "The dark side of liquidity regulation: Bank opacity and funding liquidity risk," Journal of Financial Intermediation, Elsevier, vol. 52(C).
    15. Adi Mordel, 2018. "Prudential Liquidity Regulation in Banking-A Literature Review," Discussion Papers 18-8, Bank of Canada.
    16. Rezende, Marcelo & Styczynski, Mary-Frances & Vojtech, Cindy M., 2021. "The Effects of Liquidity Regulation on Bank Demand in Monetary Policy Operations," Journal of Financial Intermediation, Elsevier, vol. 46(C).

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