DP9124 The Impact of Liquidity Regulation on Bank Intermediation

Author(s): Clemens Bonner, Sylvester C W Eijffinger
Publication Date: September 2012
Date Revised: June 2013
Keyword(s): banks, finance, financial intermediation, liquidity, monetary policy
JEL(s): E42, G18, G21
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=9124

We analyze the impact of non-compliance with a requirement similar to the Basel III Liquidity Coverage Ratio and its impact on bank intermediation applying Regression Discontinuity Designs. Using a unique dataset on Dutch banks, we show that non-compliance with a liquidity requirement causes banks to pay and charge higher interest rates as well as to increase borrowing and decrease lending on the long-term interbank market. Apart from lending rates, the short-term market is unlikely to be affected by the requirement. While non-compliance with a liquidity requirement does not seem to directly affect corporate lending rates, we find evidence that institutions with a liquidity deficiency turn to the long-term interbank rate as reference for lending to non-financial institutions.