November 2016

The Effects of Liquidity Regulation on Bank Demand in Monetary Policy Operations

Marcelo Rezende, Mary-Frances Styczynski, and Cindy M. Vojtech


We estimate the effects of the liquidity coverage ratio (LCR), a liquidity requirement for banks, on the tenders that banks submit in Term Deposit Facility operations, a Federal Reserve tool created to manage the quantity of bank reserves. We identify these effects using variation in LCR requirements across banks and a change over time that allowed term deposits to count toward the LCR. Banks subject to the LCR submit tenders more often and submit larger tenders than exempt banks when term deposits qualify for the LCR. These results suggest that liquidity regulation affects bank demand in monetary policy operations.

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Keywords: Basel III, monetary policy, excess reserves, liquidity coverage ratio, term deposit facility


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Last Update: June 19, 2020