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Liquidity Regulation and Bank Lending

Foly Ananou (), Amine Tarazi and John Wilson
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Foly Ananou: LAPE - Laboratoire d'Analyse et de Prospective Economique - GIO - Gouvernance des Institutions et des Organisations - UNILIM - Université de Limoges

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Abstract: Bank liquidity shortages during the global financial crisis of 2007-2009 led to the introduction of liquidity regulations, the impact of which has attracted the attention of academics and policymakers. In this paper, we investigate the impact of liquidity regulation on bank lending. As a setting, we use the Netherlands, where a Liquidity Balance Rule (LBR) was introduced in 2003. The LBR was imposed on Dutch banks only and did not apply to other banks operating elsewhere within the Eurozone. Using this differential regulatory treatment to overcome identification concerns and a difference-in-differences approach, we find that stricter liquidity requirements did not reduce the lending of Dutch banks relative to other banks not subject to the provisions of the LBR. However, the LBR did lead Dutch banks to modify the structure of loan portfolios by increasing corporate lending and reducing mortgage lending relative to banks not subject to the LBR. Dutch banks also experienced a significant increase in deposits and issued more equity relative to counterparts not subject to the liquidity requirements. Overall, our results have obvious relevance for policymakers tasked with monitoring the impact of liquidity regulations on banks and the real economy.

Keywords: Bank Lending; Basel III; Liquidity Regulation; Liquidity Balance Rule; Liquidity Coverage Ratio; Propensity Score Matching (search for similar items in EconPapers)
Date: 2020-10-14
New Economics Papers: this item is included in nep-ban and nep-cba
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Journal Article: Liquidity regulation and bank lending (2021) Downloads
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