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Federal Reserve Bank of New York
Staff Reports
Bank Liquidity Creation, Systemic Risk, and Basel Liquidity Regulations
Daniel Roberts
Asani Sarkar
Or Shachar
Abstract

We find that banks subject to the Liquidity Coverage Ratio (LCR banks) create less liquidity per dollar of assets in the post-LCR period than non-LCR banks by, in part, lending less. However, we also find that LCR banks are more resilient as they contribute less to fire-sale risk, relative to non-LCR banks. We estimate the net after-tax benefits from reduced lending and fire-sale risk to be about 1.4 percent of assets in 2013:Q2-2014 for large banks. 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.


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Daniel Roberts & Asani Sarkar & Or Shachar, Bank Liquidity Creation, Systemic Risk, and Basel Liquidity Regulations, Federal Reserve Bank of New York, Staff Reports 852, 01 Jun 2018, revised 01 Aug 2019.
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Note: Previous title: “Bank Liquidity Provision and Basel Liquidity Regulations”
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Keywords: LCR; banks; liquidity creation
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