Spillover Effects of Banks’ Liquidity Risk Control

65 Pages Posted: 10 Nov 2016 Last revised: 5 Mar 2019

See all articles by Yong Kyu Gam

Yong Kyu Gam

Southwestern University of Finance and Economics (SWUFE)

Date Written: February 21, 2019

Abstract

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

Gam, Yong Kyu, Spillover Effects of Banks’ Liquidity Risk Control (February 21, 2019). Available at SSRN: https://ssrn.com/abstract=2866645 or http://dx.doi.org/10.2139/ssrn.2866645

Yong Kyu Gam (Contact Author)

Southwestern University of Finance and Economics (SWUFE) ( email )

55 Guanghuacun St
Chengdu, Sichuan 610074
China

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