Bank balance sheet dynamics under a regulatory liquidity-coverage-ratio constraint

Lakshmi Balasubramanyan () and David VanHoose

Journal of Macroeconomics, 2013, vol. 37, issue C, 53-67

Abstract: The Basel III standards include a liquidity-coverage-ratio (LCR) constraint that creates an intertemporal link between contemporaneous bank balance-sheet choices and lagged deposits. Assessing the effects of an LCR constraint for banks’ optimal deposit and loan choices requires an intertemporal framework. Our analysis of a dynamic banking model shows that imposing an LCR constraint generally has theoretically ambiguous effects on the stability of banks’ optimal dynamic balance-sheet paths. Even in special cases, such as a situation in which regulators prohibit banks from applying securities to fulfill the LCR constraint or in which banks simultaneously confront risk-based capital regulation while facing rigidities in their equity capital positions, optimal bank deposit paths exhibit increased intertemporal persistence but become more responsive to shocks to market interest rates.

Keywords: Liquidity-coverage-ratio; Intertemporal bank model; Balance sheet dynamics (search for similar items in EconPapers)
JEL-codes: G21 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (34)

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Working Paper: Bank balance sheet dynamics under a regulatory liquidity-coverage-ratio constraint (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:37:y:2013:i:c:p:53-67

DOI: 10.1016/j.jmacro.2013.03.003

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