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The cost of bank liquidity

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  • William C Handorf

Abstract

Many banks are under regulatory pressure from Basel III to improve liquidity by investing in more short-term, low-risk securities and to fund assets by more long-term, stable sources of debt. The relationship between short-term and long-term interest rates is known as the term structure of interest rates long evaluated by financial economists. This article empirically demonstrates the importance of a liquidity premium and a credit risk premium within the term structure and notes the financial consequence of these incremental costs on banks trying to enhance their liquidity coverage ratio or their net stable funding ratio. Liquidity has a cost that will reduce bank profits via a lower net interest spread. If bank liquidity is sufficient to withstand subsequent periods of market stress, the regulatory plan will reduce public expenditures often associated with bank failure.

Suggested Citation

  • William C Handorf, 2014. "The cost of bank liquidity," Journal of Banking Regulation, Palgrave Macmillan, vol. 15(1), pages 1-13, January.
  • Handle: RePEc:pal:jbkreg:v:15:y:2014:i:1:p:1-13
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    Cited by:

    1. Sarmiento, Miguel & Galán, Jorge E., 2017. "The influence of risk-taking on bank efficiency: Evidence from Colombia," Emerging Markets Review, Elsevier, vol. 32(C), pages 52-73.
    2. repec:pal:jbkreg:v:20:y:2019:i:2:d:10.1057_s41261-018-0076-1 is not listed on IDEAS
    3. repec:pal:jbkreg:v:20:y:2019:i:2:d:10.1057_s41261-018-0080-5 is not listed on IDEAS

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