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
Date Written: November 28, 2015
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: Suggested Citation