Spillover Effects of Banks’ Liquidity Risk Control
65 Pages Posted: 10 Nov 2016 Last revised: 5 Mar 2019
Date Written: February 21, 2019
This study investigates spillover effects of banks’ liquidity risk control on the real economy by using the introduction of the Basel III liquidity regulation as shocks to banks. Since the Basel Committee’s official endorsement of this new liquidity regulation in December 2010, banks exposed to high liquidity risk have significantly reduced the proportion of loans in their portfolio. In regions with many such banks, these reductions resulted in decreased small business lending and GDP growth. After the introduction of the new liquidity regulation, banks with less-liquid balance sheets raised their deposit rates aggressively, generating liquidity problems in nearby banks through deposit competition and ultimately curbing the expansion of these banks’ credit supply. These results demonstrate that, although more stringent liquidity regulation may make banks safer, it carries real costs as well.
Keywords: Bank, Bank Lending, Bank Regulation, Basel Accords
JEL Classification: G21, G28
Suggested Citation: Suggested Citation