 Liquidity regulation and the implementation of monetary policyMorten Bech (morten.bech@bis.org) and Todd Keister Departmental Working Papers from Rutgers University, Department of Economics Abstract: In addition to revamping existing rules for bank capital, Basel III introduces a new global framework for liquidity regulation. One part of this framework is the liquidity coverage ratio (LCR), which requires banks to hold sufficient high-quality liquid assets to survive a 30-day period of market stress. As monetary policy typically involves targeting the interest rate on loans of one of these assets - central bank reserves - it is important to understand how this regulation may impact the efficacy of central banks' current operational frameworks. We introduce term funding and an LCR requirement into an otherwise standard model of monetary policy implementation. Our model shows that if banks face the possibility of an LCR shortfall, then the usual link between open market operations and the overnight interest rate changes and the short end of the yield curve becomes steeper. Our results suggest that central banks may want to adjust their operational frameworks as the new regulation is implemented. Keywords: Basel III; Liquidity regulation; Bank reserves; Liquidity Coverage Ratio; Monetary policy (search for similar items in EconPapers) There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it. Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:rut:rutres:201325 Access Statistics for this paper More papers in Departmental Working Papers from Rutgers University, Department of Economics Contact information at EDIRC. |
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