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The 'new normal' during normal times - liquidity regulation and conventional monetary policy

Sînziana Kroon, Clemens Bonner, Iman Lelyveld and Jan Wrampelmeyer

DNB Working Papers from Netherlands Central Bank, Research Department

Abstract: We analyze the impact of a requirement similar to the Basel III Liquidity Coverage Ratio (LCR) on conventional monetary policy implementation. Combining unique data sets of Dutch banks from 2002 to 2005, we find that the introduction of the LCR impacts banks' behaviour in open market operations. After the introduction of the LCR, banks bid for higher volumes and pay higher interest rates for central bank funds. In line with theory, banks reduce their reliance on overnight and short term unsecured funding. We do not observe a worsening of collateral quality pledged in open market operations. Thus, to correctly anticipate an open market operation's effect on interest rates, monetary policy requires central banks to consider not only the size of the operation, but also how it impacts banks' liquidity management and compliance with the LCR.

Keywords: Liquidity regulation; monetary policy implementation; financial intermediation; banks; open market operations (search for similar items in EconPapers)
JEL-codes: E42 G18 G21 (search for similar items in EconPapers)
Date: 2021-01
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac and nep-mon
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