Changes in liquidity regulation and bank credit growth

Victor Osei () and Amine Tarazi
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Victor Osei: LAPE - Laboratoire d'Analyse et de Prospective Economique - GIO - Gouvernance des Institutions et des Organisations - UNILIM - Université de Limoges

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Abstract: We exploit the rule announced in 2015 to harmonize the treatment of reserves for the Liquidity Coverage Ratio (LCR) in Europe as an identification strategy to examine the impact of liquidity regulation on bank lending. We show that treated banks (those that benefitted from a relaxation of liquidity constraints) increase lending compared to their counterparts not affected by the harmonization rule. However, such a positive impact on lending is mainly effective for treated banks that are relatively small, well-diversified and with a relatively high level of liquidity and capital. Consistently, our results also show an increase in the idiosyncratic risk of small treated banks compared to control banks. For large treated banks, we observe negative abnormal returns on CDS spreads, suggesting lower risk perception by the market for such institutions.Our findings bear important policy implications for regulators in charge of bank supervision.

Keywords: Bank lending; Bank risk; Liquidity ratio; European banks; Liquidity regulation (search for similar items in EconPapers)
Date: 2024-08-27
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Working Paper: Changes in liquidity regulation and bank credit growth (2024)
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