Finance and Economics Discussion Series (FEDS)
May 2019
The costs and benefits of liquidity regulations: Lessons from an idle monetary policy tool
Christopher J. Curfman and John Kandrac
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.
Accessible materials (.zip)
Keywords: Monetary policy, bank failure, bank lending, liquidity regulation, required reserves
DOI: https://doi.org/10.17016/FEDS.2019.041
PDF: Full Paper