The ‘New Normal’ During Normal Times – Liquidity Regulation and Conventional Monetary Policy

38 Pages Posted: 11 Jan 2021

See all articles by Sînziana Kroon

Sînziana Kroon

De Nederlandsche Bank

Clemens Bonner

De Nederlandsche Bank

Iman van Lelyveld

De Nederlandsche Bank; Vrije Universiteit Amsterdam

Jan Wrampelmeyer

Vrije Universiteit Amsterdam, School of Business and Economics; Tinbergen Institute

Date Written: January 7, 2021

Abstract

We analyze the impact of a requirement similar to the Basel III Liquidity Coverage Ratio (LCR) on conventional monetary policy implementation. Combining unique data sets of Dutch banks from 2002 to 2005, we find that the introduction of the LCR impacts banks’ behaviour in open market operations. After the introduction of the LCR, banks bid for higher volumes and pay higher interest rates for central bank funds. In line with theory, banks reduce their reliance on overnight and short term unsecured funding. We do not observe a worsening of collateral quality pledged in open market operations. Thus, to correctly anticipate an open market operation’s effect on interest rates, monetary policy requires central banks to consider not only the size of the operation, but also how it impacts banks’ liquidity management and compliance with the LCR.

Keywords: Liquidity regulation, monetary policy implementation, financial intermediation, banks, open market operations

JEL Classification: G18, G21, E42

Suggested Citation

Kroon Petrescu, Sînziana and Bonner, Clemens and van Lelyveld, Iman and Wrampelmeyer, Jan, The ‘New Normal’ During Normal Times – Liquidity Regulation and Conventional Monetary Policy (January 7, 2021). De Nederlandsche Bank Working Paper No. 703, Available at SSRN: https://ssrn.com/abstract=3763715 or http://dx.doi.org/10.2139/ssrn.3763715

Sînziana Kroon Petrescu (Contact Author)

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Clemens Bonner

De Nederlandsche Bank ( email )

Netherlands

Iman van Lelyveld

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Vrije Universiteit Amsterdam ( email )

Netherlands

Jan Wrampelmeyer

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

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