Net Stable Funding Ratio and Liquidity Hoarding

Martin Windl ()
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Martin Windl: University of Augsburg

Schmalenbach Business Review, 2019, vol. 71, issue 1, No 6, 57-85

Abstract: Abstract As a component of the liquidity requirements of Basel III, the Net Stable Funding Ratio (NSFR) seeks to limit the maturity transformation of banks. This paper examines whether the NSFR affects the inefficient precautionary liquidity hoarding of banks and the stability of interbank markets. Based on Acharya and Skeie (2011), the model introduces regulation into a two-period framework with asymmetric information and stochastic credit risk. As a result, due to regulatory costs, the NSFR increases the bid-ask spread on the interbank market. The effects depend strongly on the quality and the forbearance of the regulator. High-quality supervision counters the precautionary liquidity hoarding of banks resulting from asymmetric information, thereby decreasing market failure.

Keywords: Basel III; Regulation; Liquidity hoarding (search for similar items in EconPapers)
JEL-codes: G21 G28 G33 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1007/s41464-019-00066-x

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