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The Liquidity Coverage Ratio and Security Prices

Author

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  • Lucas Marc Fuhrer
  • Benjamin Müller
  • Luzian Steiner

Abstract

What is the added value of a security which qualifies as a "high-quality liquid asset" (HQLA) under the Basel III "Liquidity Coverage Ratio" (LCR)? In this paper, we quantify the added value in terms of yield changes and, as suggested by Stein (2013), call it HQLA premium. To do so, we exploit the introduction of the LCR in Switzerland as a unique quasi-natural experiment and we find evidence for the existence of an HQLA premium in the order of 4 basis points. Guided by theoretical considerations, we claim that the HQLA premium is state dependent and argue that our estimate is a lower bound measure. Furthermore, we discuss the implications of an economically significant HQLA premium. Thereby, we contribute to a better understanding of the LCR and its implications for financial markets.

Suggested Citation

  • Lucas Marc Fuhrer & Benjamin Müller & Luzian Steiner, 2016. "The Liquidity Coverage Ratio and Security Prices," Working Papers 2016-11, Swiss National Bank.
  • Handle: RePEc:snb:snbwpa:2016-11
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    References listed on IDEAS

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    Cited by:

    1. W. Arrata & B. Nguyen & I. Rahmouni-Rousseau & M. Vari, 2017. "Eurosystem’s asset purchases and money market rates," Working papers 652, Banque de France.
    2. Fuhrer, Lucas Marc, 2018. "Liquidity in the repo market," Journal of International Money and Finance, Elsevier, vol. 84(C), pages 1-22.
    3. Bank for International Settlements, 2017. "Repo market functioning," CGFS Papers, Bank for International Settlements, number 59, July.
    4. Schmidt, Kirsten, 2019. "Does liquidity regulation impede the liquidity profile of collateral?," Working Paper Series 2256, European Central Bank.
    5. Daniel Kohler & Benjamin Müller, 2019. "Covered interest rate parity, relative funding liquidity and cross-currency repos," Working Papers 2019-05, Swiss National Bank.

    More about this item

    Keywords

    Basel III; Liquidity Coverage Ratio; high-quality liquid assets; HQLA premium;

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • 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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