Bank Regulatory Capital and Liquidity: Evidence from U.S. and European Publicly Traded Banks

54 Pages Posted: 14 Jul 2011 Last revised: 14 Mar 2013

See all articles by Isabelle Distinguin

Isabelle Distinguin

Université de Limoges, LAPE

Caroline Roulet

University of Limoges; JPLCSASU

Amine Tarazi

University of Limoges - Faculty of Law and Economic Science

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Date Written: March 12, 2013

Abstract

The theory of financial intermediation highlights various channels through which capital and liquidity are interrelated. Using a simultaneous equations framework, we investigate the relationship between bank regulatory capital and bank liquidity measured from on-balance sheet positions for European and U.S. publicly traded commercial banks. Previous research studying the determinants of bank capital buffer has neglected the role of liquidity. On the whole, we find that banks decrease their regulatory capital ratios when they face higher illiquidity as defined in the Basel III accords or when they create more liquidity as measured by Berger and Bouwman (2009). However, considering other measures of illiquidity that focus more closely on core deposits in the United States, our results show that small banks strengthen their solvency standards when they are exposed to higher illiquidity. Our empirical investigation supports the need to implement minimum liquidity ratios concomitant to capital ratios, as stressed by the Basel Committee; however, our findings also shed light on the need to further clarify how to define and measure illiquidity and also on how to regulate large banking institutions, which behave differently than smaller ones.

Keywords: Bank Regulatory Capital, Liquidity, Bank Regulation

JEL Classification: G21, G28

Suggested Citation

Distinguin, Isabelle and Roulet, Caroline and Tarazi, Amine, Bank Regulatory Capital and Liquidity: Evidence from U.S. and European Publicly Traded Banks (March 12, 2013). Available at SSRN: https://ssrn.com/abstract=1884811 or http://dx.doi.org/10.2139/ssrn.1884811

Isabelle Distinguin

Université de Limoges, LAPE ( email )

5 rue Félix Eboué BP3127
LIMOGES, 87031
France

Caroline Roulet (Contact Author)

University of Limoges ( email )

rue François Mitterrand
Limoges Cedex, FL Limoges 87031
France

JPLCSASU ( email )

54 avenue de la Révolution
Limoges, Limousin 87000
France

Amine Tarazi

University of Limoges - Faculty of Law and Economic Science ( email )

5 rue Felix Eboue
Limoges, 87000
France

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