The costs and benefits of liquidity regulations: Lessons from an idle monetary policy tool

Christopher Curfman and John Kandrac
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John Kandrac: https://www.federalreserve.gov/econres/john-kandrac.htm

No 2019-041, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We investigate how liquidity regulations affect banks by examining a dormant monetary policy tool that functions as a liquidity regulation. Our identification strategy uses a regression kink design that relies on the variation in a marginal high-quality liquid asset (HQLA) requirement around an exogenous threshold. We show that mandated increases in HQLA cause banks to reduce credit supply. Liquidity requirements also depress banks' profitability, though some of the regulatory costs are passed on to liability holders. We document a prudential benefit of liquidity requirements by showing that banks subject to a higher requirement before the financial crisis had lower odds of failure.

Keywords: Monetary Policy; Bank Failure; Bank Lending; Liquidity Regulation; Required Reserves (search for similar items in EconPapers)
JEL-codes: E51 E52 E58 G21 G28 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2019-05-28
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 (2)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2019-41

DOI: 10.17016/FEDS.2019.041

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