ECB published a working paper that investigates the costs and benefits of liquidity regulation. The authors find that liquidity tools are beneficial but cannot completely remove the need for Lender of Last Resort (LOLR) interventions by the central bank.
The paper investigated the extent to which the two main liquidity ratios (Liquidity Coverage Ratio, or LCR, and the Net Stable Funding Ratio, or NSFR) might have been effective in reducing liquidity take-up by European banks during the post-Lehman crisis as well as the European Sovereign Debt crisis. It was found that full compliance with the current LCR and NSFR rules would have reduced banks’ reliance on publicly provided liquidity during the global financial crisis, without removing such assistance altogether. Nevertheless, the evidence also suggested that liquidity regulations (at least as currently specified) would not have prevented the need for large public liquidity assistance for European banks. The empirical results, therefore, pointed to caution against expecting the end of LOLR interventions due to the application of the current liquidity policy tools.
The authors estimated the cost for banks of complying with the LCR and NSFR and found that these costs turn out to be non-trivial but small, especially when compared with the costs of capital requirements. When the introduction of the LCR and NSFR was simulated in two structural macro-financial models, it was found that the regulations would lead to relatively modest declines in lending and real activity. The analysis, therefore, suggested that while the LCR and NSFR do not have financial stability benefits on a par with bank capital requirements, they are still useful due to their relatively low cost.
Related Link: Working Paper (PDF)
Keywords: Europe, EU, Banking, Liquidity Risk, LCR, NSFR, Basel III, ECB
Previous ArticleEC Amends Regulation on Liquidity Coverage Requirements for Banks
EBA issued a revised list of validation rules with respect to the implementing technical standards on supervisory reporting.
EBA published its response to the call for advice of EC on ways to strengthen the EU legal framework on anti-money laundering and countering the financing of terrorism (AML/CFT).
NGFS published a paper on the overview of environmental risk analysis by financial institutions and an occasional paper on the case studies on environmental risk analysis methodologies.
MAS published the guidelines on individual accountability and conduct at financial institutions.
APRA published final versions of the prudential standard APS 220 on credit quality and the reporting standard ARS 923.2 on repayment deferrals.
SRB published two articles, with one article discussing the framework in place to safeguard financial stability amid crisis and the other article outlining the path to a harmonized and predictable liquidation regime.
FSB hosted a virtual workshop as part of the consultation process for its evaluation of the too-big-to-fail reforms.
ECB updated the list of supervised entities in EU, with the number of significant supervised entities being 115.
OSFI published the key findings of a study on third-party risk management.
FSB is extending the implementation timeline, by one year, for the minimum haircut standards for non-centrally cleared securities financing transactions or SFTs.