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Determinants of banks' liquidity: a French perspective on market and regulatory ratio interactions

Sandrine Lecarpentier, Cyril Pouvelle () and Olivier de Bandt ()

No 2019-18, EconomiX Working Papers from University of Paris Nanterre, EconomiX

Abstract: The objective of the paper is to investigate how banks adjust the structure of their balance sheet as a response to a funding shock and to propose a methodology for projecting banks’ liquidity ratios in a top-down stress test scenario. In line with a theoretical model assessing the effects of capital and liquidity constraints on banks’ behaviour, we estimate the joint system of banks’ solvency and liquidity ratios, using for proxy of the latter, the "liquidity coefficient" implemented in France before Basel III. We provide evidence of a positive effect of the solvency ratio on the liquidity coefficient: a high level of solvency enables the liquidity coefficient to improve due to a more stable funding structure. By contrast, we do not find firm evidence of an impact of the liquidity coefficient on the solvency ratio. We also show that financial variables capturing international markets’ risk aversion and tensions in the interbank market have a significant impact during periods of stress only, confirming the evidence of strong interactions between market liquidity and bank funding liquidity during crisis periods.

Keywords: Bank Capital Regulation; Bank Liquidity Regulation; Basel III; stress tests (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2019
New Economics Papers: this item is included in nep-ban and nep-cba
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