The impact of liquidity regulation on banks

Working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 24 July 2015

Working Paper No. 536
By Ryan N Banerjee and Hitoshi Mio 

We present the first study to estimate the causal effect of liquidity regulation on bank balance sheets. It takes advantage of the heterogeneous implementation of tighter liquidity regulation by the UK Financial Services Authority in 2010. We find that banks adjusted the composition of both assets and liabilities, increasing the share of high-quality liquid assets and non-financial deposits while reducing intra-financial loans and short-term wholesale funding. We do not find evidence that the tightening of liquidity regulation caused banks to shrink their balance sheets, nor reduce the amount of lending to the non-financial sector.

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