 The role of US bank liquidity and regulations in Covered Interest Parity deviationsWalter Bazán-Palomino, Marco Ortiz, Marco E. Terrones and Diego Winkelried Journal of International Financial Markets, Institutions and Money, 2025, vol. 102, issue C Abstract: This paper examines how private bank regulation and liquidity provided by the Federal Reserve in the US are related to deviations from the covered interest parity (CIP). We find evidence that the effects of bank liquidity on CIP deviations partially offset those resulting from regulatory changes in a sample of 11 OECD countries over the 2001-2019 period. This finding supports the conjecture that changes in private banks’ liquidity and regulation can significantly affect the cross-currency basis. Interestingly, the effects of liquidity on CIP deviations become more pronounced as bank regulation intensifies, reflecting interaction effects. One implication is that stricter regulations may amplify liquidity-related distortions, thereby increasing CIP deviations. Keywords: Cross-currency bases; Covered interest rate parity; Bank regulation; Liquidity (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:102:y:2025:i:c:s1042443125000630 DOI: 10.1016/j.intfin.2025.102173 Access Statistics for this article Journal of International Financial Markets, Institutions and Money is currently edited by I. Mathur and C. J. Neely More articles in Journal of International Financial Markets, Institutions and Money from Elsevier |
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