Benefits and Costs of Liquidity Regulation

67 Pages Posted: 19 Jul 2018

See all articles by Marie Hoerova

Marie Hoerova

European Central Bank (ECB); Centre for Economic Policy Research (CEPR)

Caterina Mendicino

Bank of Portugal; European Central Bank (ECB) - Directorate General Research

Kalin Nikolov

European Central Bank (ECB)

Glenn Schepens

ECB -Financial Research Division

Skander Van den Heuvel

Federal Reserve Board

Date Written: July 13, 2018

Abstract

This paper investigates the costs and benefi ts of liquidity regulation. We find that liquidity tools are bene ficial but cannot completely remove the need for Lender of Last Resort (LOLR) interventions by the central bank. Full compliance with current Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) rules would have reduced banks' reliance on publicly provided liquidity during the global fi nancial crisis without removing such assistance altogether. The paper also investigates the output costs of introducing the LCR and NSFR using two macro-fi nancial models. We find these costs to be modest.

Keywords: Banking, Liquidity regulation, Capital requirements, Central bank, Lender-of-last-resort

JEL Classification: E44, E58, G21, G28

Suggested Citation

Hoerova, Marie and Mendicino, Caterina and Nikolov, Kalin and Schepens, Glenn and Van den Heuvel, Skander, Benefits and Costs of Liquidity Regulation (July 13, 2018). ECB Working Paper No. 2169. Available at SSRN: https://ssrn.com/abstract=3215723

Marie Hoerova (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Caterina Mendicino

Bank of Portugal ( email )

Rua Francisco Ribeiro, 2
Lisbon, 1150-165
Portugal

European Central Bank (ECB) - Directorate General Research ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

Kalin Nikolov

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Glenn Schepens

ECB -Financial Research Division ( email )

Frankfurt am Main
Germany

Skander Van den Heuvel

Federal Reserve Board ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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