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The Unintended Consequences of the Basel III Liquidity Risk Regulation

28 Pages Posted: 30 Jun 2012 Last revised: 23 Jul 2012

Massimiliano Neri

Moody's Analytics; Finance Research Center @ UFM

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

Neri, Massimiliano, The Unintended Consequences of the Basel III Liquidity Risk Regulation (June 30, 2012). Available at SSRN: or

Massimiliano Neri (Contact Author)

Moody's Analytics ( email )

1 Canada Square
London, E14 5FA
United Kingdom
630822653 (Phone)


Finance Research Center @ UFM ( email )

Academic Building, B-300
Calle Manuel F. Ayau (6 Calle final) zona 10
Guatemala, 01010


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