Basel III liquidity coverage ratio and the operating target of monetary policy: the unintended discord
Sitikantha Pattanaik (),
Rajesh Kavediya and
Additional contact information
Sitikantha Pattanaik: RBI
Rajesh Kavediya: RBI
Angshuman Hait: RBI
Journal of Banking Regulation, 2018, vol. 19, issue 2, 160-173
Abstract Proactive management of liquidity by a central bank is critical to achieve the operating target of monetary policy. The implementation of Basel III liquidity coverage ratio (LCR) regulations, however, could potentially alter the conditions in the unsecured segment of the money market and therefore influence the evolution of the operating target of monetary policy. This apparent discord requires empirical validation, which this paper attempts using data for the Indian banking system. Empirical estimates from a panel data model point to LCR-constrained banks in India borrowing at a higher rate in the call money market, and under alternative specifications of the model, the weighted average call rate or the operating target of monetary policy is pushed up by 5–7 bps. These banks also tend to borrow more and lend less in the call market, and when they lend, they seem to lend at about 5 bps higher. Even after introducing an additional variable in the model to account for the impact of liquidity conditions on the operating target, the LCR still remains a statistically significant determinant of borrowing spreads. The empirical evidence for India validates the presence of unintended impact of the LCR on the operating target of monetary policy, even as the limited nature of the impact does not point to the need for any revamp of the current operating framework.
Keywords: Liquidity coverage ratio (LCR); Basel III; Operating target of monetary policy (search for similar items in EconPapers)
JEL-codes: E52 E58 G28 (search for similar items in EconPapers)
References: Add references at CitEc
Citations Track citations by RSS feed
Downloads: (external link)
http://link.springer.com/10.1057/s41261-017-0043-2 Abstract (text/html)
Access to full text is restricted to subscribers.
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:pal:jbkreg:v:19:y:2018:i:2:d:10.1057_s41261-017-0043-2
Ordering information: This journal article can be ordered from
Access Statistics for this article
Journal of Banking Regulation is currently edited by Dalvinder Singh
More articles in Journal of Banking Regulation from Palgrave Macmillan
Bibliographic data for series maintained by Sonal Shukla ().