Determinants of Banks’ Liquidity: A French Perspective on Interactions between Market and Regulatory Requirements

44 Pages Posted: 13 Oct 2020

See all articles by Olivier de Bandt

Olivier de Bandt

Banque de France - Economic Study and Research Division

celine lecarpentier

affiliation not provided to SSRN

Cyril Pouvelle

Banque de France

Date Written: September 2020

Abstract

The paper investigates the impact of solvency and liquidity regulation on banks' balance sheet structure. The Covid-19 pandemics shows that periods of sharp increase in risk aversion often result in liquidity strains for banks due to the volatility of long-term funding markets.

According to a simple portfolio allocation model banks’ liquidity increases when the regulatory constraint is binding. We provide evidence, using the “liquidity coefficient” implemented in France ahead of Basel III's Liquidity Coverage Ratio, of a positive effect of the solvency ratio on the liquidity coefficient. We also show that in times of crisis, measured by financial variables, French banks actually decreased the liquidity coefficient, with the transmission channel materialising mainly on the liability side.

Keywords: Bank Capital Regulation, Bank Liquidity Regulation, Basel III, Stress Tests

JEL Classification: G28, G21

Suggested Citation

de Bandt, Olivier and lecarpentier, celine and Pouvelle, Cyril, Determinants of Banks’ Liquidity: A French Perspective on Interactions between Market and Regulatory Requirements (September 2020). Banque de France Working Paper No. 782, Available at SSRN: https://ssrn.com/abstract=3707993 or http://dx.doi.org/10.2139/ssrn.3707993

Olivier De Bandt (Contact Author)

Banque de France - Economic Study and Research Division ( email )

31, rue Croix des Petits Champs
75049 Paris Cedex 01
FRANCE
(33 1) 42 92 28 80 (Phone)
(33 1) 42 92 27 66 (Fax)

Celine Lecarpentier

affiliation not provided to SSRN

Cyril Pouvelle

Banque de France ( email )

Paris
France

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