Will Basel III Liquidity Measures Affect Banks' Funding Costs and Financial Performance?: Evidence from U.S. Commercial Banks

46 Pages Posted: 20 Aug 2015 Last revised: 6 Mar 2018

See all articles by Muhammad Saifuddin Khan

Muhammad Saifuddin Khan

University of Technology Sydney (UTS) - School of Finance and Economics; University of Dhaka - Department of Finance

Harald (Harry) Scheule

University of Technology Sydney (UTS) - School of Finance and Economics; Financial Research Network

Eliza Wu

The University of Sydney - Business School; Financial Research Network (FIRN)

Date Written: November 28, 2015

Abstract

Basel III has introduced new liquidity standards to directly enhance asset liquidity and funding stability within deposit taking institutions. We investigate the links between asset liquidity and funding stability as measured under the Basel III regulatory framework and US banks' deposit funding costs and their financial performance as well. We find that banks derive benefits from a lower cost of deposit funding in response to improved funding stability and that Basel III liquidity measures also improve banks' financial performance. However, whilst larger banks perform better financially in response to improvements in their funding stability, greater asset liquidity instead reduces their financial performance. Finally, banks with higher capital buffers benefit from having access to cheaper deposit funding in response to greater funding stability. There are clear policy implications from our findings to guide further bank regulatory reforms.

Keywords: Liquidity, bank funding costs, capital, Basel III

JEL Classification: G21, G10, G18

Suggested Citation

Khan, Muhammad Saifuddin and Scheule, Harald and Wu, Eliza, Will Basel III Liquidity Measures Affect Banks' Funding Costs and Financial Performance?: Evidence from U.S. Commercial Banks (November 28, 2015). Available at SSRN: https://ssrn.com/abstract=2647368 or http://dx.doi.org/10.2139/ssrn.2647368

Muhammad Saifuddin Khan (Contact Author)

University of Technology Sydney (UTS) - School of Finance and Economics ( email )

Haymarket
Sydney, NSW 2007
Australia
+61406520897 (Phone)

University of Dhaka - Department of Finance ( email )

Department of Finance
University of Dhaka
Dhaka, 1000
Bangladesh

Harald Scheule

University of Technology Sydney (UTS) - School of Finance and Economics ( email )

P.O. Box 123
Broadway, NSW 2007
Australia

HOME PAGE: http://https://www.uts.edu.au/staff/harald.scheule

Financial Research Network ( email )

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Eliza Wu

The University of Sydney - Business School ( email )

University of Sydney
Darlington
Sydney, NSW 2006
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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