Liquidity regulation and the implementation of monetary policy

Morten Bech (morten.bech@bis.org) and Todd Keister

No 432, BIS Working Papers from Bank for International Settlements

Abstract: In addition to revamping existing rules for bank capital, Basel III introduces a new global framework for liquidity regulation. One part of this framework is the liquidity coverage ratio (LCR), which requires banks to hold sufficient high-quality liquid assets to survive a 30-day period of market stress. As monetary policy typically involves targeting the interest rate on loans of one of these assets — central bank reserves — it is important to understand how this regulation may impact the efficacy of central banks’ current operational frameworks. We introduce term funding and an LCR requirement into an otherwise standard model of monetary policy implementation. Our model shows that if banks face the possibility of an LCR shortfall, then the usual link between open market operations and the overnight interest rate changes and the short end of the yield curve becomes steeper. Our results suggest that central banks may want to adjust their operational frameworks as the new regulation is implemented.

Keywords: Basel III; Liquidity regulation; LCR; Reserves; Corridor system; Monetary policy (search for similar items in EconPapers)
Pages: 41 pages
Date: 2013-10
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (24)

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Related works:
Journal Article: Liquidity regulation and the implementation of monetary policy (2017)
Working Paper: Liquidity regulation and the implementation of monetary policy (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:bis:biswps:432

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