LCR optimization by banks: Evidence from changes in liquidity requirements in Switzerland

Marc Blatter and Joséphine Molleyres

No 2025-18, Working Papers from Swiss National Bank

Abstract: In this paper, we analyze the effects of the introduction of the liquidity coverage ratio (LCR) on banks' funding behavior. We use changes in regulatory liquidity requirements in Switzerland as a natural experiment. Using data for the period before and after the LCR was applied for all banks in Switzerland, our dataset allows us to analyze how the introduction of the LCR affects the banks' funding structure. Our results show that the LCR had its intended effects as banks reduced their exposure to short-term funding. At the same time, we find evidence for optimization of the LCR by banks. Banks optimize their LCR by extending the maturities of liabilities slightly over 30 days, which leads to an improvement in the LCR by 10 percentage points on average. Our results imply that it makes sense to complement the 30-day LCR with longer-term liquidity requirements to reduce cliff risks.

Keywords: Regulatory arbitrage; Liquidity regulation; Contractual maturity mismatches; Funding structure (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Pages: 20 pages
Date: 2025
New Economics Papers: this item is included in nep-cba and nep-inv
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Persistent link: https://EconPapers.repec.org/RePEc:snb:snbwpa:2025-18

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