Abstract
We assess the determinants of banks’ liquidity holdings using data for nearly 7000 banks from 25 OECD countries. We highlight the role of several bank-specific, institutional and policy variables in shaping banks’ liquidity risk management. Our main question is whether liquidity regulation neutralizes banks’ incentives to hold liquid assets. Without liquidity regulation, the determinants of banks’ liquidity buffers are a combination of bank-specific and country-specific variables. While most incentives are neutralized by liquidity regulation, a bank’s disclosure requirements remain important. The complementarity of disclosure and liquidity requirements provides a strong rationale for considering them jointly in the design of regulation.
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Notes
See ESRB (2013).
See Drehmann and Nikolaou (2009).
See Brunnermeier (2009).
Please note that even non-binding liquidity requirement is likely to change banks’ relative incentives to hold certain assets.
See Gennaioli et al. (2014) who provide a similar argumentation for banks’ reserve requirements.
The largest difference regarding central bank reserves stems from the treatment of the minimum reserves banks are required to deposit at the central bank. While some jurisdictions allow banks to add minimum reserves in full to their liquidity buffer, other jurisdictions only allow reserves in excess of the reserve requirement. Since the dataset does not distinguishing the two types of reserves, central bank reserves are not considered part of banks’ liquidity buffers.
Denominator definitions differ substantially across the various requirements. Requirements either do not include any weighting or show large differences regarding the treatment of institutions’ liabilities.
Also see Farag et al. (2013).
While there are certainly arguments in favor of incorporating the recent crisis period, we specifically decided against it. We are particularly interested in banks’ incentives to hold liquid assets during normal times as insurance against crises. Additionally taking into account a crisis period would weaken the explanatory power of our results as the “clean” incentive effect would be distorted by crisis related factors (e.g. actual government interventions). In Section 6 we do, however, discuss the development of liquidity holdings after 2007.
Please note that all findings reported below are robust to using the alternative Local GAAP accounting standard where possible.
The variable’s source is the World Bank’s World Development Indicators (WDI). See also Demirgüç-Kunt et al. (2005).
Given that some of the classifications might be arbitrary, we also use an alternative measure of liquidity regulation, based on the answers to a survey circulated in the BCBS Working Group on Liquidity (WGL). The results are qualitatively similar.
These variables include GDP growth, inflation, short- and long-term interest rates, stock market capitalization, government debt and financial openness.
Please note that this argument holds despite the fact that retail deposits are considered to be one of the most stable source of funding.
Note that the first indicator is not presented because there was extensive central bank support in all countries under analysis and therefore correlation coefficients cannot be calculated.
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Acknowledgments
This paper was conceived while Van Lelyveld and Zymek were at the Bank of England. We would like to thank Jack Bekooij for excellent statistical support, seminar participants at De Nederlandsche Bank, the Bank of England, the European Banking Authority, University of Osnabrueck as well as Jakob de Haan, Leo de Haan, Valeriya Dinger, Michel Heijdra, Paul Hilbers, Harry Huizinga, Jan Willem van den End, Lars Overby and Stefan Schmitz for comments and suggestions. The paper represents the authors’ opinions and not necessarily those of the affiliated institutions.
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Bonner, C., Lelyveld, I.v. & Zymek, R. Banks’ Liquidity Buffers and the Role of Liquidity Regulation. J Financ Serv Res 48, 215–234 (2015). https://doi.org/10.1007/s10693-014-0207-5
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DOI: https://doi.org/10.1007/s10693-014-0207-5