The Liquidity Coverage Ratio and security prices

Lucas Fuhrer, Benjamin Müller and Luzian Steiner

Journal of Banking & Finance, 2017, vol. 75, issue C, 292-311

Abstract: What is the added value of a security which qualifies as a “high-quality liquid asset” (HQLA) under the Basel III “Liquidity Coverage Ratio” (LCR)? In this paper, we quantify the added value in terms of yield changes and, as suggested by Stein (2013), call it “HQLA premium”. To do so, we exploit the introduction of the LCR in Switzerland as a unique quasi-natural experiment and we find evidence for the existence of an HQLA premium in the order of 4 basis points. Guided by theoretical considerations, we claim that the HQLA premium is state dependent and argue that our estimate is a lower bound measure. Furthermore, we discuss the implications of an economically significant HQLA premium. Thereby, we contribute to a better understanding of the LCR and its implications for financial markets.

Keywords: Basel III; Liquidity Coverage Ratio; High-quality liquid assets; HQLA premium (search for similar items in EconPapers)
JEL-codes: E50 G10 G18 G21 G28 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (23)

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Working Paper: The Liquidity Coverage Ratio and Security Prices (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:75:y:2017:i:c:p:292-311

DOI: 10.1016/j.jbankfin.2016.11.018

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