Quality is Our Asset: The International Transmission of Liquidity Regulation

36 Pages Posted: 18 May 2020

Date Written: May 15, 2020

Abstract

We examine how banks’ cross-border lending reacts to changes in liquidity regulation using a new dataset on Individual Liquidity Guidance (ILG), which was enacted in the UK from 2000 to 2015 and is similar to the Basel III Liquidity Coverage Ratio. A one percentage point increase in liquidity requirements to total assets reduces UK resident banks’ cross-border lending growth by around 0.6 percentage points and both bank and non-bank lending are affected. But quality matters: an increase in the holdings of High Quality Liquid Asset (HQLA) qualifying sovereign debt offsets some of the reduction in total cross-border lending growth. Furthermore, the strongest reduction is driven by foreign subsidiaries from countries where sovereigns do not issue HQLA; in contrast subsidiaries from countries issuing HQLA are able to protect their lending to unrelated entities and cut their intragroup lending instead. Banks with a higher deposit share as a consequence of established retail operations, such as those headquartered in the UK, are also able to offset the effects of increases of liquidity requirement on cross-border lending.

Keywords: Liquidity regulation, liquidity requirements, external lending, intensity of prudential regulations

JEL Classification: G21, G28, F36

Suggested Citation

Reinhardt, Dennis and Reynolds, Stephen and Sowerbutts, Rhiannon and van Hombeeck, Carlos Eduardo, Quality is Our Asset: The International Transmission of Liquidity Regulation (May 15, 2020). Bank of England Working Paper No. 860, Available at SSRN: https://ssrn.com/abstract=3601837 or http://dx.doi.org/10.2139/ssrn.3601837

Dennis Reinhardt (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Stephen Reynolds

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Rhiannon Sowerbutts

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Carlos Eduardo Van Hombeeck

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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