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

48 Pages Posted: 25 Jul 2019 Last revised: 21 Oct 2019

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: 2019-05-28

Abstract

We investigate how liquidity regulations affect banks by examining a dormant 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 had lower odds of failure.

Keywords: Monetary Policy, Bank Failure, Bank Lending, Liquidity Regulation, Required Reserves

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

Suggested Citation

Curfman, Christopher J and Kandrac, John, The Costs and Benefits of Liquidity Regulations: Lessons from an Idle Monetary Policy Tool (2019-05-28). FEDS Working Paper No. 2019-041. Available at SSRN: https://ssrn.com/abstract=3423247 or http://dx.doi.org/10.17016/FEDS.2019.041

Christopher J Curfman (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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

John Kandrac

Board of Governors of the Federal Reserve System ( email )

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

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