The Unintended Consequences of the Basel III Liquidity Risk Regulation
28 Pages Posted: 30 Jun 2012 Last revised: 23 Jul 2012
Date Written: June 30, 2012
The new liquidity risk regulation represents the chief innovation introduced by Basel III, following the regulator‘s intention to fix Basel II‘s omissions. We review the substitution effect set off on the bank‘s balance sheets by the new liquidity risk regulation, which dissuades the use of the unsecured interbank market as a source of funding liquidity and promotes the reliance on sovereign debt and central bank support as the main source of liquidity. Such assessment of the new liquidity risk regulation shows that its application is not without unintended consequences, which we study in terms of the impacts on financial stability, the macroeconomic consequences and the moral hazard introduced in the banking system.
Keywords: Basel III, LCR, liquidity risk, unsecured money markets, moral hazard
JEL Classification: E40, E50, G18
Suggested Citation: Suggested Citation