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What drives the liquidity of sovereign bonds when markets are under stress? An assessment of the new Basel 3 rules on bank liquid assets

Giovanni Petrella and Andrea Resti

Journal of Financial Stability, 2017, vol. 33, issue C, 297-310

Abstract: The new rules on bank liquidity set by the Basel Committee require banks to hold high-quality liquid assets (HQLAs) against future cash outflows in periods of market stress. Domestic government bonds are considered to be HQLAs. To assess the appropriateness of this rule, we investigate the liquidity of European government bonds in ordinary times and in periods of market turmoil. We find that the effect of adverse market conditions on liquidity strongly depends on individual bond’s characteristics. Our evidence argues for rules on HQLAs that should constrain the eligibility of government bonds depending on their characteristics (primarily, duration and rating).

Keywords: Liquidity risk; Liquidity coverage ratio; High-quality liquid assets (HQLAs); Basel 3; Basel committee (search for similar items in EconPapers)
JEL-codes: G18 G19 G29 (search for similar items in EconPapers)
Date: 2017
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Journal of Financial Stability is currently edited by I. Hasan, W. C. Hunter and G. G. Kaufman

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Handle: RePEc:eee:finsta:v:33:y:2017:i:c:p:297-310