On Regulation and Excess Reserves: The Case of Basel III

Journal of Financial Research

66 Pages Posted: 22 Mar 2021 Last revised: 9 Jul 2021

See all articles by Stephen Matteo Miller

Stephen Matteo Miller

George Mason University - Mercatus Center

Blake Hoarty

U.S. Bureau of Labor Statistics

Multiple version iconThere are 2 versions of this paper

Date Written: June 3, 2021

Abstract

Common explanations for the observed rise in excess bank reserves include payment of interest on reserves and liquidity regulations, but capital regulations may also matter. We show that a profit maximizing bank substitutes from higher risk-weight loans to lower risk-weight reserves and Treasuries if the risk-based capital ratio, but not the leverage ratio, increases. Estimated treatment effects for “advanced approaches” bank holding companies, the focus of Basel III capital regulations, initially increased for reserves after the regulatory changes, but later decreased when treatment effects for Treasuries increased as Treasury yields rose; treatment effects for loans became increasingly negative.

Keywords: Basel III Regulation, Excess Reserves, Interest on Reserves

JEL Classification: E02, F33, G01, G18, G28

Suggested Citation

Miller, Stephen Matteo and Hoarty, Blake, On Regulation and Excess Reserves: The Case of Basel III (June 3, 2021). Journal of Financial Research, Available at SSRN: https://ssrn.com/abstract=3807645

Stephen Matteo Miller (Contact Author)

George Mason University - Mercatus Center ( email )

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Arlington, VA 22201
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Blake Hoarty

U.S. Bureau of Labor Statistics ( email )

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Washington, DC 20212
United States
9194145917 (Phone)

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