Bank balance sheet dynamics under a regulatory liquidity-coverage-ratio constraint

Lakshmi Balasubramanyan () and David VanHoose

No 1209, Working Papers (Old Series) from Federal Reserve Bank of Cleveland

Abstract: This paper presents a dynamic model of a bank?s optimal choices of imposing a binding liquidity-coverage-ratio (LCR) constraint. Our baseline balance-sheet dynamics starts with portfolio separation and no LCR constraint. Under a scenario in which regulators prohibit banks from applying securities to fulf ll the LCR constraint, portfolio separation continues to hold, but deposit holdings depend on the extent to which the LCR constraint is binding. When banks are allowed to apply securities toward satisfying the constraint, portfolio separation can break down and lead to ambiguous effects on optimal dynamic loan and deposit paths. Our results indicate that under special cases in which portfolio separation holds, the LCR constraint affects bank-sheet dynamics in ways not previously recognized. As regulators move forward in implementing Basel III style LCR, it is imperative to understand the effects of the LCR constraint on bank balance-sheet dynamics.

Keywords: Banks and banking; Liquidity (Economics) (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-ban
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Journal Article: Bank balance sheet dynamics under a regulatory liquidity-coverage-ratio constraint (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedcwp:1209

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DOI: 10.26509/frbc-wp-201209

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