Does Liquidity Regulation Impede the Liquidity Profile of Collateral?

52 Pages Posted: 29 Mar 2019

See all articles by Kirsten Schmidt

Kirsten Schmidt

Halle Institute for Economic Research

Date Written: March 27, 2019

Abstract

We analyze the pledging behavior of Euro area banks during the introduction of the liquidity coverage ratio (LCR). The LCR considers only a subset of central bank eligible assets and thereby offers banks an arbitrage opportunity to improve their regulatory ratio by altering their collateral pledging with the European Central Bank. We use the existence of national liquidity requirements to proxy for banks’ incentives to exploit this differential treatment of central bank eligible assets. Using security-level information on collateral pledged with the central bank, we find that banks without a preceding national liquidity requirement pledge more and less liquid collateral than banks with a preceding national liquidity requirement after the LCR introduction. We attribute the difference across banks to a preparation effect of the liquidity regulation on the national level.

Keywords: liquidity regulation, monetary policy, central bank refinancing operations

JEL Classification: G21, G28, E42, E52, E58

Suggested Citation

Schmidt, Kirsten, Does Liquidity Regulation Impede the Liquidity Profile of Collateral? (March 27, 2019). ECB Working Paper No. 2256 (2019); ISBN 978-92-899-3518-0. Available at SSRN: https://ssrn.com/abstract=3361491

Kirsten Schmidt (Contact Author)

Halle Institute for Economic Research ( email )

P.O. Box 11 03 61
Kleine Maerkerstrasse 8
D-06017 Halle, 06108
Germany

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