Liquidity Regulation and Bank Risk Taking on the Horizon

92 Pages Posted: 2 Apr 2020 Last revised: 21 Jan 2023

See all articles by Joshua Bosshardt

Joshua Bosshardt

Federal Housing Finance Agency

Ali Kakhbod

University of California, Berkeley

Farzad Saidi

Boston University - Questrom School of Business; Centre for Economic Policy Research (CEPR)

Date Written: March 9, 2020

Abstract

We examine how banks' liquidity requirements affect their incentives to take risk with their remaining illiquid assets. Our model predicts that banks with more stable liabilities are more likely to engage in risk taking in response to tighter liquidity requirements. This prediction is borne out in transaction-level data on corporate and mortgage loans for U.S. banks subject to the liquidity coverage ratio (LCR). For identification, we exploit variation in long-term bank bonds held by insurance companies that are not affected by the LCR. Our results point to a trade-off between bank risk taking and ensuring funding resilience over different horizons.

Keywords: liquidity regulation, bank risk taking, insurance sector, LCR, NSFR

JEL Classification: G20, G21, G22, G28

Suggested Citation

Bosshardt, Joshua and Kakhbod, Ali and Saidi, Farzad, Liquidity Regulation and Bank Risk Taking on the Horizon (March 9, 2020). Available at SSRN: https://ssrn.com/abstract=3550912 or http://dx.doi.org/10.2139/ssrn.3550912

Joshua Bosshardt (Contact Author)

Federal Housing Finance Agency ( email )

400 7th Street SW
Washington, DC 20552
United States

Ali Kakhbod

University of California, Berkeley ( email )

Haas School of Business
2220 Piedmont Ave
Berkeley, CA 94720
United States

Farzad Saidi

Boston University - Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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