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Liquidity Regulation, Funding Costs and Corporate Lending

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  • Clemens Bonner

Abstract

This paper analyzes the impact of a liquidity requirement similar to the Basel 3 Liquidity Coverage Ratio (LCR) on banks' funding costs and corporate lending rates. Using a dataset of 26 Dutch banks from January 2008 to December 2011, I find that banks which are just above/below their quantitative liquidity requirement do not charge higher interest rates for corporate lending. This effect is caused by banks being not able to pass on their increased funding costs in the interbank market to private sector clients, implying that banks do not have pricing power. The results are robust to including demand effects, solvency and loan characteristics. The analysis in this paper suggests that the current design of the LCR is unlikely to have a major impact on corporate lending rates.

Suggested Citation

  • Clemens Bonner, 2012. "Liquidity Regulation, Funding Costs and Corporate Lending," DNB Working Papers 361, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:dnbwpp:361
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    File URL: https://www.dnb.nl/en/binaries/Working%20Paper%20361_tcm47-283047.pdf
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    Citations

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    Cited by:

    1. Patty Duijm & Peter Wierts, 2016. "The Effects of Liquidity Regulation on Bank Assets and Liabilities," International Journal of Central Banking, International Journal of Central Banking, vol. 12(2), pages 385-411, June.
    2. Bologna, Pierluigi, 2018. "Banks’ maturity transformation: risk, reward, and policy," ESRB Working Paper Series 63, European Systemic Risk Board.
    3. Ryan N. Banerjee & Hitoshi Mio, 2014. "The Impact of Liquidity Regulation on Banks," BIS Working Papers 470, Bank for International Settlements.
    4. Fuhrer, Lucas Marc & Müller, Benjamin & Steiner, Luzian, 2017. "The Liquidity Coverage Ratio and security prices," Journal of Banking & Finance, Elsevier, vol. 75(C), pages 292-311.
    5. Pierluigi Bologna, 2017. "Banks’ maturity transformation: risk, reward, and policy," Temi di discussione (Economic working papers) 1159, Bank of Italy, Economic Research and International Relations Area.
    6. Meraj Allahrakha & Benjamin Munyan, 2016. "Do Higher Capital Standards Always Reduce Bank Risk? The Impact of the Basel Leverage Ratio on the U.S. Triparty Repo Market," Working Papers 16-11, Office of Financial Research, US Department of the Treasury.

    More about this item

    Keywords

    Monetary transmission mechanism; Liquidity; Basel 3; Lending; Interest Rate;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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