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The Costs and Benefits of Liquidity Regulations

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Abstract

We find that, relative to other banks, those subject to the Liquidity Coverage Ratio (LCR) reduce lending and liquidity creation but also contribute less to fire-sale externalities. For large LCR banks, we estimate the total after-tax benefits of reduced fire-sale risk (net of the costs associated with foregone lending) exceed $50 billion from the second quarter of 2013 to 2017. We additionally document large increases in both lending and liquidity creation by midsized, non-LCR banks, such that the average bank lends more and creates an equivalent amount of liquidity per dollar of assets following LCR. Our findings highlight the migration of liquidity creation activities from regulated to un- regulated banks.

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  • Daniel Roberts & Asani Sarkar & Or Shachar, 2018. "The Costs and Benefits of Liquidity Regulations," Staff Reports 852, Federal Reserve Bank of New York.
  • Handle: RePEc:fip:fednsr:852
    Note: Revised October 2021. Previous titles: “Bank Liquidity Provision and Basel Liquidity Regulations”; “Bank Liquidity Creation, Systemic Risk, and Basel Liquidity Regulations”
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    References listed on IDEAS

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    1. Enrico Perotti & Javier Suarez, 2011. "A Pigovian Approach to Liquidity Regulation," International Journal of Central Banking, International Journal of Central Banking, vol. 7(4), pages 3-41, December.
    2. Adrian, Tobias & Boyarchenko, Nina, 2018. "Liquidity policies and systemic risk," Journal of Financial Intermediation, Elsevier, vol. 35(PB), pages 45-60.
    3. Anil K. Kashyap & Raghuram Rajan & Jeremy C. Stein, 2002. "Banks as Liquidity Providers: An Explanation for the Coexistence of Lending and Deposit‐taking," Journal of Finance, American Finance Association, vol. 57(1), pages 33-73, February.
    4. Jennie Bai & Arvind Krishnamurthy & Charles†Henri Weymuller, 2018. "Measuring Liquidity Mismatch in the Banking Sector," Journal of Finance, American Finance Association, vol. 73(1), pages 51-93, February.
    5. Jane E. Ihrig & Edward Kim & Ashish Kumbhat & Cindy M. Vojtech & Gretchen C. Weinbach, 2017. "How Have Banks Been Managing the Composition of High-Quality Liquid Assets?," Finance and Economics Discussion Series 2017-092, Board of Governors of the Federal Reserve System (U.S.).
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    Cited by:

    1. Wayne Passmore & Judit Temesvary, 2020. "Investor Demands for Safety, Bank Capital, and Liquidity Measurement," Finance and Economics Discussion Series 2020-079, Board of Governors of the Federal Reserve System (U.S.).
    2. Adi Mordel, 2018. "Prudential Liquidity Regulation in Banking-A Literature Review," Discussion Papers 18-8, Bank of Canada.
    3. Jiakai Chen & Haoyang Liu & Asani Sarkar & Zhaogang Song, 2020. "Dealers and the Dealer of Last Resort: Evidence from MBS Markets in the COVID-19 Crisis," Staff Reports 933, Federal Reserve Bank of New York.
    4. Okahara, Naoto, 2020. "Liquidity requirement and banks' lending," MPRA Paper 101816, University Library of Munich, Germany.
    5. Richard K. Crump & João A. C. Santos, 2018. "Review of New York Fed studies on the effects of post-crisis banking reforms," Economic Policy Review, Federal Reserve Bank of New York, issue 24-2, pages 71-90.
    6. Joshua Bosshardt & Ali Kakhbod & Farzad Saidi, 2021. "The Bank Liquidity Channel of Financial (In)stability," ECONtribute Discussion Papers Series 108, University of Bonn and University of Cologne, Germany.

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    More about this item

    Keywords

    liquidity coverage ratio; banks; liquidity creation; lending; systemic risk;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • 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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