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The Effects of Liquidity Regulation on Bank Demand in Monetary Policy Operations

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Abstract

We estimate the effects of the liquidity coverage ratio (LCR), a liquidity requirement for banks, on the tenders that banks submit in Term Deposit Facility operations, a Federal Reserve tool created to manage the quantity of bank reserves. We identify these effects using variation in LCR requirements across banks and a change over time that allowed term deposits to count toward the LCR. Banks subject to the LCR submit tenders more often and submit larger tenders than exempt banks when term deposits qualify for the LCR. These results suggest that liquidity regulation affects bank demand in monetary policy operations.

Suggested Citation

  • Marcelo Rezende & Mary-Frances Styczynski & Cindy M. Vojtech, 2016. "The Effects of Liquidity Regulation on Bank Demand in Monetary Policy Operations," Finance and Economics Discussion Series 2016-090, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2016-90
    DOI: 10.17016/FEDS.2016.090
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    11. Han Chen & Jim Clouse & Jane Ihrig & Elizabeth Klee, 2016. "The Federal Reserve's Tools for Policy Normalization in a Preferred Habitat Model of Financial Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(5), pages 921-955, August.
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    15. Roc Armenter & Benjamin Lester, 2017. "Excess Reserves and Monetary Policy Implementation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 23, pages 212-235, January.
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    Cited by:

    1. Kedan, Danielle & Veghazy, Alexia Ventula, 2021. "The implications of liquidity regulation for monetary policy implementation and the central bank balance sheet size: an empirical analysis of the euro area," Working Paper Series 2515, European Central Bank.
    2. Christopher Curfman & John Kandrac, 2019. "The costs and benefits of liquidity regulations: Lessons from an idle monetary policy tool," Finance and Economics Discussion Series 2019-041, Board of Governors of the Federal Reserve System (U.S.).
    3. Michael Boutros & Jonathan Witmer, 2020. "Monetary Policy Implementation in a Negative Rate Environment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(2-3), pages 441-470, March.
    4. Howard Diesel & Mukelani Nkuna & Tim Olds & Daan Steenkamp, 2022. "ThecostofcomplyingwithBaselIIIliquidityregulationsforSouthAfricanbanks," Working Papers 11032, South African Reserve Bank.

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    More about this item

    Keywords

    Liquidity Coverage Ratio; Term Deposit Facility; Monetary Policy; Excess Reserves; Basel III;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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