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The LCR Premium in Peru: Estimating the Impact of a Regulatory Supply Shock on LCR Ratio

Author

Listed:
  • Delia Ruiz

    (Central Reserve Bank of Peru)

  • Diego Franco

    (Central Reserve Bank of Peru)

  • Walter Cuba

    (Central Reserve Bank of Peru)

Abstract

This paper examines the existence and magnitude of an "LCR premium" in Peru's interbank market by exploiting the July 1, 2019 reform that eliminated the punitive outflow weights on repo collateral under the Liquidity Coverage Ratio (LCR). Using daily transactions from January 2019 to February 2020, a Difference-in-Differences (DiD) design reveals repo rates declined by an additional 3-4 pp relative to unsecured loans. We then embed this supply-shock in a structural IV-2SLS framework, finding that a 1 pp increase in the rate reduces repo volumes by 2,495.5 mm PEN. Robustness checks - including alternative +-3/4/6-month windows, dynamic DiD and placebo DiD- confirm instrument validity and parallel trends. Post-reform, average monthly repo activity jumped from ~5,800 mm to ~22,400 mm PEN, demonstrating that even modest liquidityrule adjustments can quickly eliminate the pre-reform penalty on secured funding and reorient banks toward collateralized trades.

Suggested Citation

  • Delia Ruiz & Diego Franco & Walter Cuba, 2025. "The LCR Premium in Peru: Estimating the Impact of a Regulatory Supply Shock on LCR Ratio," IHEID Working Papers 13-2025, Economics Section, The Graduate Institute of International Studies.
    • Handle: RePEc:gii:giihei:heidwp13-2025
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    JEL classification:

    • 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
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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