Bank Liquidity Creation, Systemic Risk, and Basel Liquidity Regulations

57 Pages Posted: 20 Jun 2018 Last revised: 6 Sep 2019

See all articles by Daniel Roberts

Daniel Roberts

Federal Reserve Banks - Federal Reserve Bank of New York

Asani Sarkar

Federal Reserve Bank of New York

Or Shachar

Federal Reserve Bank of New York

Date Written: June 1, 2018

Abstract

We find that banks subject to the Liquidity Coverage Ratio (LCR) create less liquidity per dollar of assets in the post-LCR period than banks not subject to the LCR, in part because LCR banks make fewer loans. However, we also find that LCR banks are more resilient, as they contribute less to fire-sale risk relative to non-LCR banks. For large banks, we estimate the net after-tax benefits from reduced lending and fire-sale risk to be about 1.4 percent of assets from second-quarter 2013 through fourth-quarter 2014. 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: Liquidity Coverage Ratio, banks, liquidity creation, lending, systemic risk

JEL Classification: G01, G21, G28

Suggested Citation

Roberts, Daniel and Sarkar, Asani and Shachar, Or, Bank Liquidity Creation, Systemic Risk, and Basel Liquidity Regulations (June 1, 2018). FRB of New York Staff Report No. 852, Available at SSRN: https://ssrn.com/abstract=3199876 or http://dx.doi.org/10.2139/ssrn.3199876

Daniel Roberts

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Asani Sarkar (Contact Author)

Federal Reserve Bank of New York ( email )

Research Department
33 Liberty Street
New York, NY 10045
United States
212-720-8943 (Phone)
212-720-1582 (Fax)

HOME PAGE: http://www.newyorkfed.org/research/economists/sarkar/pub.html

Or Shachar

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States
(212) 720-6974 (Phone)
(212) 720-1582 (Fax)

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