Liquidity Regulation and Bank Lending

46 Pages Posted: 14 Apr 2020 Last revised: 1 Jun 2021

See all articles by Foly Ananou

Foly Ananou

Université de Limoges, LAPE

Dimitris K. Chronopoulos

University of St. Andrews - School of Management

Amine Tarazi

University of Limoges - Faculty of Law and Economic Science

John O. S. Wilson

University of St. Andrews

Date Written: May 28, 2021

Abstract

Bank liquidity shortages during the global financial crisis of 2007-2009 led to the introduction of liquidity regulations, the impact of which has attracted the attention of academics and policymakers. In this paper, we investigate the impact of liquidity regulation on bank lending. As a setting, we use the Netherlands, where a Liquidity Balance Rule (LBR) was introduced in 2003. The LBR was imposed on Dutch banks only and did not apply to other banks operating elsewhere within the Eurozone. Using this differential regulatory treatment to overcome identification concerns and a difference-in-differences approach, we find that the LBR increased the volume of lending by Dutch banks relative to other banks located in the Eurozone. Increased equity, an inflow of retail deposits and subsequent increase in balance sheet size allowed Dutch banks to increase lending despite having to meet the LBR requirements. The LBR also affected loan composition (with corporate and retail lending increasing more than mortgage lending) and the maturity profile of loan portfolios. Our results have relevance for policymakers tasked with monitoring the impact of liquidity regulations on banks and the real economy.

Keywords: Bank Lending, Basel III, Liquidity Regulation, Liquidity Balance Rule, Liquidity Coverage Ratio, Propensity Score Matching

JEL Classification: G21, G28

Suggested Citation

Ananou, Foly and Chronopoulos, Dimitris K. and Tarazi, Amine and Wilson, John O. S., Liquidity Regulation and Bank Lending (May 28, 2021). Available at SSRN: https://ssrn.com/abstract=3560215 or http://dx.doi.org/10.2139/ssrn.3560215

Foly Ananou (Contact Author)

Université de Limoges, LAPE ( email )

5 rue Félix Eboué BP3127
LIMOGES, 87031
France

Dimitris K. Chronopoulos

University of St. Andrews - School of Management ( email )

The Gateway
North Haugh
St. Andrews, Fife, Scotland KY16 9SS
United Kingdom

Amine Tarazi

University of Limoges - Faculty of Law and Economic Science ( email )

5 rue Felix Eboue
Limoges, 87000
France

John O. S. Wilson

University of St. Andrews ( email )

North St
Saint Andrews, Fife KY16 9AJ
United Kingdom

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