Liquidity Regulation and Bank Lending

35 Pages Posted: 14 Apr 2020 Last revised: 22 Jun 2020

See all articles by Foly Ananou

Foly Ananou

Université de Limoges, LAPE

Amine Tarazi

University of Limoges - Faculty of Law and Economic Science

John O. S. Wilson

University of St. Andrews

Date Written: June 19, 2020

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 stricter liquidity requirements did not reduce the lending of Dutch banks relative to other banks not subject to the provisions of the LBR. However, the LBR did lead Dutch banks to modify the structure of loan portfolios by increasing corporate lending and reducing mortgage lending relative to banks not subject to the LBR. Dutch banks also experienced a significant increase in deposits and issued more equity relative to counterparts not subject to the liquidity requirements. Overall, our results have obvious 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 Tarazi, Amine and Wilson, John O. S., Liquidity Regulation and Bank Lending (June 19, 2020). 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

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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