Working Paper
The costs and benefits of liquidity regulations: Lessons from an idle monetary policy tool
Abstract: We investigate how liquidity regulations affect banks by examining a dormant monetary policy tool that functions as a liquidity regulation. Our identification strategy uses a regression kink design that relies on the variation in a marginal high-quality liquid asset (HQLA) requirement around an exogenous threshold. We show that mandated increases in HQLA cause banks to reduce credit supply. Liquidity requirements also depress banks' profitability, though some of the regulatory costs are passed on to liability holders. We document a prudential benefit of liquidity requirements by showing that banks subject to a higher requirement before the financial crisis had lower odds of failure.
Keywords: Monetary Policy; Bank Failure; Bank Lending; Liquidity Regulation; Required Reserves;
JEL Classification: G21; E58; E51; G28; E52;
https://doi.org/10.17016/FEDS.2019.041
Access Documents
File(s): File format is application/pdf https://www.federalreserve.gov/econres/feds/files/2019041pap.pdf
Authors
Bibliographic Information
Provider: Board of Governors of the Federal Reserve System (U.S.)
Part of Series: Finance and Economics Discussion Series
Publication Date: 2019-05-28
Number: 2019-041
Pages: 48 pages