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Quality is our asset: the international transmission of liquidity regulation

Dennis Reinhardt (), Stephen Reynolds (), Rhiannon Sowerbutts and Carlos Eduardo van Hombeeck
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Stephen Reynolds: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH

No 860, Bank of England working papers from Bank of England

Abstract: We examine how banks’ cross-border lending reacts to changes in liquidity regulation using a new dataset on Individual Liquidity Guidance (ILG), which was enacted in the UK from 2000 to 2015 and is similar to the Basel III Liquidity Coverage Ratio. A one percentage point increase in liquidity requirements to total assets reduces UK resident banks’ cross-border lending growth by around 0.6 percentage points and both bank and non-bank lending are affected. But quality matters: an increase in the holdings of High Quality Liquid Asset (HQLA) qualifying sovereign debt offsets some of the reduction in total cross-border lending growth. Furthermore, the strongest reduction is driven by foreign subsidiaries from countries where sovereigns do not issue HQLA; in contrast subsidiaries from countries issuing HQLA are able to protect their lending to unrelated entities and cut their intragroup lending instead. Banks with a higher deposit share as a consequence of established retail operations, such as those headquartered in the UK, are also able to offset the effects of increases of liquidity requirement on cross-border lending.

Keywords: Liquidity regulation; liquidity requirements; external lending; intensity of prudential regulations (search for similar items in EconPapers)
JEL-codes: F36 G21 G28 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2020-05-21
New Economics Papers: this item is included in nep-ban, nep-cba, nep-ifn, nep-mon and nep-rmg
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