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Bank balance sheet dynamics under a regulatory liquidity-coverage-ratio constraint

Author

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  • Balasubramanyan, Lakshmi
  • VanHoose, David D.

Abstract

The Basel III standards include a liquidity-coverage-ratio (LCR) constraint that creates an intertemporal link between contemporaneous bank balance-sheet choices and lagged deposits. Assessing the effects of an LCR constraint for banks’ optimal deposit and loan choices requires an intertemporal framework. Our analysis of a dynamic banking model shows that imposing an LCR constraint generally has theoretically ambiguous effects on the stability of banks’ optimal dynamic balance-sheet paths. Even in special cases, such as a situation in which regulators prohibit banks from applying securities to fulfill the LCR constraint or in which banks simultaneously confront risk-based capital regulation while facing rigidities in their equity capital positions, optimal bank deposit paths exhibit increased intertemporal persistence but become more responsive to shocks to market interest rates.

Suggested Citation

  • Balasubramanyan, Lakshmi & VanHoose, David D., 2013. "Bank balance sheet dynamics under a regulatory liquidity-coverage-ratio constraint," Journal of Macroeconomics, Elsevier, vol. 37(C), pages 53-67.
  • Handle: RePEc:eee:jmacro:v:37:y:2013:i:c:p:53-67
    DOI: 10.1016/j.jmacro.2013.03.003
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    References listed on IDEAS

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    Cited by:

    1. Popoyan, Lilit & Napoletano, Mauro & Roventini, Andrea, 2017. "Taming macroeconomic instability: Monetary and macro-prudential policy interactions in an agent-based model," Journal of Economic Behavior & Organization, Elsevier, vol. 134(C), pages 117-140.
    2. Karel Brůna & Naďa Blahová, 2015. "Ekonomické a regulatorní podmínky řízení likvidity v bankovním sektoru České republiky v kontextu aplikace poměru likvidního krytí
      [Economic and Regulatory Conditions of Liquidity Management in the
      ," Politická ekonomie, University of Economics, Prague, vol. 2015(6), pages 768-713.
    3. repec:eee:ecmode:v:67:y:2017:i:c:p:193-202 is not listed on IDEAS
    4. Karel Brůna & Naďa Blahová, 2015. "Ekonomické a regulatorní podmínky řízení likvidity v bankovním sektoru České republiky v kontextu aplikace poměru likvidního krytí
      [Economic and Regulatory Conditions of Liquidity Management in the
      ," Politická ekonomie, University of Economics, Prague, vol. 2015(6), pages 689-713.
    5. Grzegorz Hałaj, 2016. "Dynamic Balance Sheet Model With Liquidity Risk," International Journal of Theoretical and Applied Finance (IJTAF), World Scientific Publishing Co. Pte. Ltd., vol. 19(07), pages 1-37, November.
    6. Sebastian Krug & Matthias Lengnick & Hans-Werner Wohltmann, 2014. "The impact of Basel III on financial (in)stability: an agent-based credit network approach," Quantitative Finance, Taylor & Francis Journals, vol. 15(12), pages 1917-1932, December.
    7. Ihrig, Jane E. & Kim, Edward & Kumbhat, Ashish & Vojtech, Cindy M. & Weinbach, Gretchen C., 2017. "How Have Banks Been Managing the Composition of High-Quality Liquid Assets?," Finance and Economics Discussion Series 2017-092, Board of Governors of the Federal Reserve System (U.S.), revised 15 Feb 2018.
    8. repec:eee:jbfina:v:87:y:2018:i:c:p:87-101 is not listed on IDEAS
    9. Jill Cetina & Katherine Gleason, 2015. "The Difficult Business of Measuring Banks' Liquidity: Understanding the Liquidity Coverage Ratio," Working Papers 15-20, Office of Financial Research, US Department of the Treasury.
    10. Kok, Christoffer & Hałaj, Grzegorz, 2014. "Modeling emergence of the interbank networks," Working Paper Series 1646, European Central Bank.
    11. Clancy, Daragh & Merola, Rossana, 2017. "Countercyclical capital rules for small open economies," Journal of Macroeconomics, Elsevier, vol. 54(PB), pages 332-351.
    12. Karel Brůna & Naďa Blahová, 2016. "Systemic Liquidity Shocks and Banking Sector Liquidity Characteristics on the Eve of Liquidity Coverage Ratio Application - The Case of the Czech Republic," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 5(1), pages 159-184.

    More about this item

    Keywords

    Liquidity-coverage-ratio; Intertemporal bank model; Balance sheet dynamics;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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