Working Paper: CEPR ID: DP9124
Authors: Clemens Bonner; Sylvester C. W. Eijffinger
Abstract: 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.
Keywords: financial intermediation; liquidity; monetary policy; finance
JEL Codes: E42; G18; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| noncompliance with the liquidity coverage ratio (LCR) (G33) | banks pay higher interest rates for long-term interbank loans (E43) |
| noncompliance with the liquidity coverage ratio (LCR) (G33) | banks charge higher interest rates for long-term interbank loans (E43) |
| noncompliance with the liquidity coverage ratio (LCR) (G33) | banks increase their borrowing volumes of loans with maturities longer than 30 days (G21) |
| noncompliance with the liquidity coverage ratio (LCR) (G33) | lending rates for both short- and long-term loans increase for noncompliant banks (G21) |
| liquidity deficiencies (G33) | banks reference the long-term interbank rate when lending to non-financial institutions (G21) |