Bank Liquidity Creation, Systemic Risk, and Basel Liquidity Regulations
58 Pages Posted: 20 Jun 2018 Last revised: 17 Aug 2019
Date Written: June 1, 2018
We find that banks subject to the Liquidity Coverage Ratio (LCR banks) create less liquidity per dollar of assets in the post-LCR period than non-LCR banks by, in part, lending less. However, we also find that LCR banks are more resilient as they contribute less to fire-sale risk, relative to non-LCR banks. We estimate the net after-tax benefits from reduced lending and fire-sale risk to be about 1.4 percent of assets in 2013:Q2-2014 for large banks. Our findings, which we show are unlikely to result from capital regulations, highlight the trade-off between lower liquidity creation and greater resilience from liquidity regulations.
Keywords: LCR, banks, liquidity creation
JEL Classification: G01, G21, G28
Suggested Citation: Suggested Citation