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The Impact of Liquidity Regulation on Banks

Ryan Banerjee and Hitoshi Mio

No 470, BIS Working Papers from Bank for International Settlements

Abstract: To the best of our knowledge, this is the first study to estimate the effect of liquidity regulation on bank balance sheets. It takes advantage of the fact that not all banks were made subject to tighter liquidity regulation by the UK Financial Services Authority (FSA) in 2010. Under this new regulation a subset of banks operating in the UK were required to hold a sufficient stock of high quality liquid assets (HQLA) to withstand two scenarios of stressed funding conditions. We find that banks adjusted both their asset and liability structures to meet tighter liquidity requirements. Banks increased the share of HQLA and funding from more stable UK non-financial deposits while reducing the share of short-term intra-financial loans and short-term wholesale funding. We do not find evidence that the tightening of liquidity regulation had an impact on the overall size of bank balance sheets or a detrimental impact on lending to the non-financial sector either through reduced lending supply or higher interest rates on loans. Overall, in response to tougher liquidity regulation, banks replaced claims on other financial institutions with cash, central bank reserves and government bonds – and so reduced the interconnectedness of the banking sector without affecting lending to the real economy.

Keywords: Banking; liquidity regulation; average treatment effect (search for similar items in EconPapers)
Pages: 31 pages
Date: 2014-10
New Economics Papers: this item is included in nep-ban and nep-cba
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Journal Article: The impact of liquidity regulation on banks (2018) Downloads
Working Paper: The impact of liquidity regulation on banks (2015) Downloads
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