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

Sandrine Lecarpentier (), Olivier de Bandt and Cyril Pouvelle
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Sandrine Lecarpentier: EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique

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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)
Date: 2019
Note: View the original document on HAL open archive server: https://hal.science/hal-04141861
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Working Paper: Determinants of banks' liquidity: a French perspective on market and regulatory ratio interactions (2019)
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