The Impact of Liquidity Regulation on Bank Intermediation

Clemens Bonner and Sylvester Eijffinger

Review of Finance, 2016, vol. 20, issue 5, 1945-1979

Abstract: We analyze the impact of a requirement similar to the Basel III Liquidity Coverage Ratio on the bank intermediation applying Regression Discontinuity Designs. Using a unique dataset on Dutch banks, we show that a liquidity requirement causes long-term borrowing and lending rates as well as demand for long-term interbank loans to increase. Lower levels of aggregate liquidity increase the estimated effects. Short-term borrowing and lending rates only rise during periods of lower market-wide liquidity. Further, banks do not seem able to pass on the increased funding costs in the interbank market to their private sector clients. Rather, a liquidity requirement seems to decrease banks’ interest margins.

Date: 2016
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Working Paper: The Impact of Liquidity Regulation on Bank Intermediation (2012)
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