The Costs and Benefits of Liquidity Regulations: Lessons from An Idle Monetary Policy Tool

46 Pages Posted: 13 Nov 2018

See all articles by Christopher J Curfman

Christopher J Curfman

Board of Governors of the Federal Reserve System

John Kandrac

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: November 3, 2018

Abstract

We investigate how liquidity regulations affect banks by examining a disused monetary policy tool that functions as a liquidity regulation. Our identification strategy uses a regression kink design that relies on the variation in a marginal high-quality liquid asset (HQLA) requirement around an exogenous threshold. We show that mandated increases in HQLA cause banks to reduce credit supply. Liquidity requirements also depress banks' profitability, though some of the regulatory costs are passed on to liability holders. We document a prudential benefit of liquidity requirements by showing that banks subject to a higher requirement before the financial crisis have lower odds of failure.

Keywords: liquidity regulation, bank lending, monetary policy, required reserves, bank failure

JEL Classification: G21, G28, E51, E52, E58

Suggested Citation

Curfman, Christopher J and Kandrac, John, The Costs and Benefits of Liquidity Regulations: Lessons from An Idle Monetary Policy Tool (November 3, 2018). Available at SSRN: https://ssrn.com/abstract=3273580 or http://dx.doi.org/10.2139/ssrn.3273580

Christopher J Curfman

Board of Governors of the Federal Reserve System ( email )

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

John Kandrac (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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

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