Discussion paper

DP9124 The Impact of Liquidity Regulation on Bank Intermediation

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.

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Citation

Eijffinger, S and C Bonner (2012), ‘DP9124 The Impact of Liquidity Regulation on Bank Intermediation‘, CEPR Discussion Paper No. 9124. CEPR Press, Paris & London. https://cepr.org/publications/dp9124