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The macroeconomic effects of a stable funding requirement

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Abstract

This paper examines the macroeconomic effects of a bank stable funding requirement of the type proposed under Basel III and introduced in New Zealand in 2010. The paper sets out a small open economy model incorporating a banking sector funded by retail deposits and short- and long-term wholesale borrowing, with a tractable setup for multi-period debt that allows hedging of benchmark interest rate risk. A stable funding requirement increases rollover in long-term funding markets, despite lower aggregate rollover. Greater exposure to long-term funding markets attenuates credit expansion if funding costs rise more steeply with volumes in less-liquid long-term markets. However, it amplifies the pro-cyclical effects of fluctuations in funding spreads because variations in long -term spreads are larger and are carried for the duration of the funding (cannot be hedged). Such amplification increases in the level of the requirement and the level of net debt. We explore approaches to moderating adverse macroeconomic outcomes.

Suggested Citation

  • Chris Bloor & Rebecca Craigie & Anella Munro, 2012. "The macroeconomic effects of a stable funding requirement," Reserve Bank of New Zealand Discussion Paper Series DP2012/05, Reserve Bank of New Zealand.
  • Handle: RePEc:nzb:nzbdps:2012/05
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    Cited by:

    1. Punnoose Jacob & Anella Munro, 2016. "A macroprudential stable funding requirement and monetary policy in a small open economy," CAMA Working Papers 2016-23, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    2. Jacob, Punnoose & Munro, Anella, 2018. "A prudential stable funding requirement and monetary policy in a small open economy," Journal of Banking & Finance, Elsevier, vol. 94(C), pages 89-106.

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    More about this item

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • 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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