Bank Liquidity Regulation and Risk

Foly Ananou (), Dimitris Chronopoulos, 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
Dimitris Chronopoulos: University of St Andrews, Centre for Responsible Banking & Finance, Gateway Building, St Andrews, Fife KY16 9RJ, UK
John Wilson: University of St Andrews, Centre for Responsible Banking & Finance, Gateway Building, St Andrews, Fife KY16 9RJ, UK

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Abstract: We investigate the impact of liquidity requirements on bank risk. Using the Netherlands as a setting, we investigate the impact of the 2003 liquidity balance rule (LBR) on individual bank default risk and systemic risk. Using the differential regulatory treatment of Dutch and other Eurozone banks (that were not subject to the LBR) to overcome identification concerns, we find that following the introduction of the LBR, the individual risk and systemic risk of Dutch banks declines relative to unaffected counterparts. The observed decline in risk is at the expense of lower profitability (driven by a decline in interest income), which is not offset by the lower funding costs of treated banks following the enactment of the LBR. Our findings also suggest that better financing conditions allow Dutch banks to increase the balance sheet shares of deposits and capital.

Keywords: Banking; liquidity regulation; Netherlands; propensity score matching; quasi-natural experiment; risk; stability; systemic risk (search for similar items in EconPapers)
Date: 2024-05-14
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