Liquidity Regulation and Bank Risk Taking on the Horizon

61 Pages Posted: 2 Apr 2020 Last revised: 29 Jul 2022

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 may affect their incentives to take risk with their remaining illiquid assets. Our simple model predicts that banks with a greater share of stable liabilities are more likely to engage in risk taking in response to tighter liquidity requirements. This prediction is borne out in syndicated-loan data 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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