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The Impact of the LCR on the Interbank Money Market

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  • Bonner, C.

    (Tilburg University, School of Economics and Management)

  • Eijffinger, S.C.W.

    (Tilburg University, School of Economics and Management)

Abstract

This paper analyzes the impact of a liquidity requirement similar to the Basel 3 Liquidity Coverage Ratio (LCR) on the unsecured interbank money market and therefore on the implementation of monetary policy. Combining two unique datasets of Dutch banks from 2005 to 2011, we show that banks which are just above/below their short-term regulatory liquidity requirement pay and charge higher interest rates for unsecured interbank loans. The effect is larger for maturities longer than the liquidity requirement's 30 day horizon. Being close to the minimum liquidity requirement induces banks to increase borrowing volumes in general while it only decreases lending volumes for maturities longer than 30 days. These results also hold when controlling for an institution's riskiness, the solvency of its counterparts, relationship-lending and period-specific effects.
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Suggested Citation

  • Bonner, C. & Eijffinger, S.C.W., 2012. "The Impact of the LCR on the Interbank Money Market," Other publications TiSEM 26967e4e-cba5-41be-b205-2, Tilburg University, School of Economics and Management.
  • Handle: RePEc:tiu:tiutis:26967e4e-cba5-41be-b205-27f625064ceb
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    1. Kurmaş AKDOĞAN & Burcu Deniz YILDIRIM, 2014. "Non-core Liabilities as an Indicator of Systemic Risk and a Liquidity Stress Test Application on Turkish Banking System," Iktisat Isletme ve Finans, Bilgesel Yayincilik, vol. 29(338), pages 39-66.
    2. Jackson, Christopher & Noss, Joseph, 2015. "A heterogeneous agent model for assessing the effects of capital regulation on the interbank money market under a corridor system," Bank of England working papers 548, Bank of England.
    3. Grundke, Peter & Kühn, André, 2020. "The impact of the Basel III liquidity ratios on banks: Evidence from a simulation study," The Quarterly Review of Economics and Finance, Elsevier, vol. 75(C), pages 167-190.
    4. Pierluigi Bologna, 2017. "Banks’ maturity transformation: risk, reward, and policy," Temi di discussione (Economic working papers) 1159, Bank of Italy, Economic Research and International Relations Area.
    5. Morten L Bech & Cyril Monnet, 2013. "The Impact of Unconventional Monetary Policy on the Overnight Interbank Market," RBA Annual Conference Volume (Discontinued), in: Alexandra Heath & Matthew Lilley & Mark Manning (ed.),Liquidity and Funding Markets, Reserve Bank of Australia.
    6. Marek Lubiński, 2013. "Międzybankowy rynek pieniężny i zarażenie," Gospodarka Narodowa. The Polish Journal of Economics, Warsaw School of Economics, issue 5-6, pages 19-41.
    7. Brini, Alessio & Tedeschi, Gabriele & Tantari, Daniele, 2023. "Reinforcement learning policy recommendation for interbank network stability," Journal of Financial Stability, Elsevier, vol. 67(C).
    8. Michael Boutros & Jonathan Witmer, 2020. "Monetary Policy Implementation in a Negative Rate Environment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(2-3), pages 441-470, March.
    9. Miguel Sarmiento, 2016. "Market Discipline and Liquidity Risk: Evidence from the Interbank Funds Market," IHEID Working Papers 14-2016, Economics Section, The Graduate Institute of International Studies.
    10. Muhammad Saifuddin Khan, 2018. "The Role of Liquidity in Financial Intermediation," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 1-2018.
    11. Banerjee, Ryan N. & Mio, Hitoshi, 2018. "The impact of liquidity regulation on banks," Journal of Financial Intermediation, Elsevier, vol. 35(PB), pages 30-44.
    12. Sitikantha Pattanaik & Rajesh Kavediya & Angshuman Hait, 2018. "Basel III liquidity coverage ratio and the operating target of monetary policy: the unintended discord," Journal of Banking Regulation, Palgrave Macmillan, vol. 19(2), pages 160-173, April.
    13. Michael Boutros & Jonathan Witmer, 2017. "Monetary Policy Implementation in a Negative Rate Environment," Staff Working Papers 17-25, Bank of Canada.
    14. Banegas, Ayelen & Tase, Manjola, 2020. "Reserve balances, the federal funds market and arbitrage in the new regulatory framework," Journal of Banking & Finance, Elsevier, vol. 118(C).
    15. Fuhrer, Lucas Marc & Müller, Benjamin & Steiner, Luzian, 2017. "The Liquidity Coverage Ratio and security prices," Journal of Banking & Finance, Elsevier, vol. 75(C), pages 292-311.

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    JEL classification:

    • 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
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System

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