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Bank liquidity risk and monetary policy. Empirical evidence on the impact of Basel III liquidity standards

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  • Gaston A. Giordana
  • Ingmar Schumacher

Abstract

We extend the literature on the bank lending channel in two aspects. First, rather than following the literature by analyzing the impact of banks'liquidity (measured via their asset portfolio) on monetary policy transmission, we study the role of banks' actual liquidity risk, as measured by the Basel III liquidity regulations. Second, we investigate the effect of complying with the Basel III liquidity standards on monetary policy transmission. We use highly detailed bank-level data from Luxembourg for the period 2003q1--2010q4. Our findings are that monetary policy transmission works its way through small banks that also have a large maturity mismatch, as measured by the Net Stable Funding Ratio. In contrast, large banks with a small maturity mismatch increase their lending following a monetary policy shock, which confirms existing results that Luxembourg’s banks are liquidity providers to the European market. Based upon in-sample predictions and upon simulated data from an optimization model that takes the banks' business models into account, we conclude that the bank lending channel will no longer be effective once banks adhere to the new Basel III liquidity regulations.

Suggested Citation

  • Gaston A. Giordana & Ingmar Schumacher, 2013. "Bank liquidity risk and monetary policy. Empirical evidence on the impact of Basel III liquidity standards," International Review of Applied Economics, Taylor & Francis Journals, vol. 27(5), pages 633-655, September.
  • Handle: RePEc:taf:irapec:v:27:y:2013:i:5:p:633-655
    DOI: 10.1080/02692171.2013.778821
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    References listed on IDEAS

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    Cited by:

    1. Gastón Andrés Giordana & Ingmar Schumacher, 2017. "An Empirical Study on the Impact of Basel III Standards on Banks’ Default Risk: The Case of Luxembourg," Journal of Risk and Financial Management, MDPI, Open Access Journal, vol. 10(2), pages 1-21, April.
    2. Yassine Bakkar & Olivier de Jonghe & Amine Tarazi, 2017. "Does banks' systemic importance affect their capital structure and balance sheet adjustment processes?," Working Papers hal-01636253, HAL.
    3. Asma Abdul Rehman & Abdelhafid Benamraoui & Aasim Munir Dad, 2018. "A comparative study of Islamic and conventional banks’ risk management practices: empirical evidence from Pakistan," Journal of Banking Regulation, Palgrave Macmillan, vol. 19(3), pages 222-235, July.
    4. Vasilios Sogiakas, 2017. "Basel III impact on the Italian banking sector," Bulletin of Applied Economics, Risk Market Journals, vol. 4(2), pages 51-55.
    5. Yassine Bakkar & Olivier de Jonghe & Amine Tarazi, 2017. "Does banks' systemic importance affect their capital structure adjustment process?," Working Papers hal-01546995, HAL.

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