Bank Liquidity Provision and Basel Liquidity Regulations

Abstract

We find that banks subject to the Liquidity Coverage Ratio (LCR) create less liquidity per dollar of assets in the post-LCR period than banks not subject to the LCR, in part because LCR banks make fewer loans. However, we also find that LCR banks are more resilient, as they contribute less to fire-sale risk relative to non-LCR banks. For large banks, we estimate the net after-tax benefits from reduced lending and fire-sale risk to be about 1.4 percent of assets from second-quarter 2013 through fourth-quarter 2014. Our findings, which we show are unlikely to result from capital regulations, highlight the trade-off between lower liquidity creation and greater resilience from liquidity regulations.