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Did Banks Subject to LCR Reduce Liquidity Creation?

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Abstract

Banks traditionally provide loans that are funded mostly by deposits and thereby create liquidity, which benefits the economy. However, since the loans are typically long-term and illiquid, whereas the deposits are short-term and liquid, this creation of liquidity entails risk for the bank because of the possibility that depositors may ?run? (that is, withdraw their deposits on short notice). To mitigate this risk, regulators implemented the liquidity coverage ratio (LCR) following the financial crisis of 2007-08, mandating banks to hold a buffer of liquid assets. A side effect ofthe regulation, however, is a reduction in liquidity creation by banks subject to LCR, as we find in our recent paper.

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  • Daniel Roberts & Asani Sarkar & Or Shachar, 2018. "Did Banks Subject to LCR Reduce Liquidity Creation?," Liberty Street Economics 20181015, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednls:87287
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    Keywords

    Liquidity Coverage Ratio; liquidity creation; HQLA; banks; loans;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets

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