Bank regulatory capital and liquidity: Evidence from US and European publicly traded banks

Isabelle Distinguin, Caroline Roulet and Amine Tarazi

Journal of Banking & Finance, 2013, vol. 37, issue 9, 3295-3317

Abstract: The theory of financial intermediation highlights various channels through which capital and liquidity are interrelated. Using a simultaneous equations framework, we investigate the relationship between bank regulatory capital and bank liquidity measured from on-balance sheet positions for European and US publicly traded commercial banks. Previous research studying the determinants of bank capital buffer has neglected the role of liquidity. On the whole, we find that banks decrease their regulatory capital ratios when they face higher illiquidity as defined in the Basel III accords or when they create more liquidity as measured by Berger and Bouwman (2009). However, considering other measures of illiquidity that focus more closely on core deposits in the United States, our results show that small banks strengthen their solvency standards when they are exposed to higher illiquidity. Our empirical investigation supports the need to implement minimum liquidity ratios concomitant to capital ratios, as stressed by the Basel Committee; however, our findings also shed light on the need to further clarify how to define and measure illiquidity and also on how to regulate large banking institutions, which behave differently than smaller ones.

Keywords: Bank regulatory capital; Liquidity; Bank regulation (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (130)

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Related works:
Working Paper: Bank Regulatory Capital and Liquidity: Evidence from US and European publicly traded banks (2013)
Working Paper: Bank Regulatory Capital and Liquidity: Evidence from U.S. and European publicly traded banks (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:37:y:2013:i:9:p:3295-3317

DOI: 10.1016/j.jbankfin.2013.04.027

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