Liquidity Regulation and the LCR Premium: Evidence from Repo Market Dynamics in Peru

Delia Ruiz, Diego Franco and Walter Cuba
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Delia Ruiz: Banco Central de Reserva del Perú.
Diego Franco: Banco Central de Reserva del Perú.
Walter Cuba: Banco Central de Reserva del Perú.

No 2025-014, Working Papers from Banco Central de Reserva del Perú

Abstract: This paper examines the existence and magnitude of an LCR premium in Peru’s interbank market by exploiting the July 2019 reform that eliminated the punitive outflow weights on repo colateral under the Liquidity Coverage Ratio (LCR). Using daily transactions from January 2019 to February 2020, a ifference-in-Differences (DiD) design reveals repo rates declined by an additional 3–4 basis points (bp) relative to unsecured loans. We then embed this supply-shock in a structural IV-2SLS framework, finding that a 1 percentage point (pp) decrease in the rate increases repo volumes by 2,495.5 mm PEN. Robustness checks —including alternative ±3/4/6-month windows, dynamic DiD and placebo DiD— confirm instrument validity and parallel trends. Post-reform, average monthly repo activity jumped from ~5,800 mm to ~22,400 mm PEN, demonstrating that even modest liquidity-rule adjustments can quickly eliminate the pre-reform penalty on secured funding and reorient banks toward collateralized trades.

Keywords: Liquidity coverage ratio; Liquidity coverage ratio premium; interbank funding; repo markets (search for similar items in EconPapers)
JEL-codes: C32 E43 G21 G28 (search for similar items in EconPapers)
Date: 2025-12
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