Benefits and Costs of Liquidity Regulation
67 Pages Posted: 19 Jul 2018
Date Written: July 13, 2018
This paper investigates the costs and benefits of liquidity regulation. We find that liquidity tools are beneficial 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 financial crisis without removing such assistance altogether. The paper also investigates the output costs of introducing the LCR and NSFR using two macro-financial 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: Suggested Citation