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The Impact of Liquidity Regulation on Bank Intermediation

  • Bonner, Clemens
  • Eijffinger, Sylvester C W

We analyze the impact of non-compliance with a requirement similar to the Basel III Liquidity Coverage Ratio and its impact on bank intermediation applying Regression Discontinuity Designs. Using a unique dataset on Dutch banks, we show that non-compliance with a liquidity requirement causes banks to pay and charge higher interest rates as well as to increase borrowing and decrease lending on the long-term interbank market. Apart from lending rates, the short-term market is unlikely to be affected by the requirement. While non-compliance with a liquidity requirement does not seem to directly affect corporate lending rates, we find evidence that institutions with a liquidity deficiency turn to the long-term interbank rate as reference for lending to non-financial institutions.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9124.

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Date of creation: Sep 2012
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Handle: RePEc:cpr:ceprdp:9124
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  1. Tobias Adrian & Hyun Song Shin, 2008. "Liquidity and leverage," Staff Reports 328, Federal Reserve Bank of New York.
  2. Q. Farooq Akram & Casper Christophersen, 2010. "Interbank overnight interest rates - gains from systemic importance," Working Paper 2010/11, Norges Bank.
  3. de Haan, Leo & van den End, Jan Willem, 2013. "Bank liquidity, the maturity ladder, and regulation," Journal of Banking & Finance, Elsevier, vol. 37(10), pages 3930-3950.
  4. Bengt Holmström & Jean Tirole, 2011. "Inside and Outside Liquidity," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262015781, June.
  5. Cocco, João F. & Gomes, Francisco J. & Martins, Nuno C., 2009. "Lending relationships in the interbank market," Journal of Financial Intermediation, Elsevier, vol. 18(1), pages 24-48, January.
  6. Bartolini, Leonardo & Bertola, Giuseppe & Prati, Alessandro, 2001. "Banks' reserve management, transaction costs, and the timing of Federal Reserve intervention," Journal of Banking & Finance, Elsevier, vol. 25(7), pages 1287-1317, July.
  7. Hume, Michael & Sentance, Andrew, 2009. "The global credit boom: Challenges for macroeconomics and policy," Journal of International Money and Finance, Elsevier, vol. 28(8), pages 1426-1461, December.
  8. Eduardo Jallath-Coria & Tridas Mukhopadhyay & Amir Yaron, 2002. "How Well Do Banks Manage Their Reserves?," NBER Working Papers 9388, National Bureau of Economic Research, Inc.
  9. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June.
  10. Douglas W. Diamond & Raghuram Rajan, 2009. "The Credit Crisis: Conjectures about Causes and Remedies," NBER Working Papers 14739, National Bureau of Economic Research, Inc.
  11. 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.).
  12. Scott Hendry & Nadja Kamhi, 2009. "Uncollateralized overnight lending in Canada," Applied Financial Economics, Taylor & Francis Journals, vol. 19(11), pages 869-880.
  13. Ulrich Bindseil & Jeroen Lamoot, 2011. "The Basel III framework for liquidity standards and monetary policy implementation," SFB 649 Discussion Papers SFB649DP2011-041, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  14. Allen N. Berger & Christa H. S. Bouwman, 2009. "Bank Liquidity Creation," Review of Financial Studies, Society for Financial Studies, vol. 22(9), pages 3779-3837, September.
  15. Shrieves, Ronald E. & Dahl, Drew, 1992. "The relationship between risk and capital in commercial banks," Journal of Banking & Finance, Elsevier, vol. 16(2), pages 439-457, April.
  16. Stefan W. Schmitz, 2013. "The Impact of the Liquidity Coverage Ratio (LCR) on the Implementation of Monetary Policy," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 42(2), pages 135-170, 07.
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