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
MAS and Temasek jointly released a report to mark the successful conclusion of the fifth and final phase of Project Ubin, which focused on building a blockchain-based multi-currency payments network prototype.
EBA published phase 2 of the technical package on the reporting framework 2.10, providing the technical tools and specifications for implementation of EBA reporting requirements.
APRA updated the lists of the Direct to APRA (D2A) validation rules for authorized deposit-taking institutions, insurers, and superannuation entities.
PRA updated the statement that provides guidance to regulated firms on implementation of the EBA guidelines on reporting and disclosure of exposures subject to measures applied in response to the COVID-19 crisis.
EBA updated the 2019 list of closely correlated currencies that was originally published in December 2013.
FASB issued a proposed Accounting Standards Update that would grant insurance companies, adversely affected by the COVID-19 pandemic, an additional year to implement the Accounting Standards Update No. 2018-12 on targeted improvements to accounting for long-duration insurance contracts, or LDTI (Topic 944).
APRA updated the regulatory approach for loans subject to repayment deferrals amid the COVID-19 crisis.
BCBS and FSB published a report on supervisory issues associated with benchmark transition.
IAIS published a report on supervisory issues associated with benchmark transition from an insurance perspective.
ESMA updated the reporting manual on the European Single Electronic Format (ESEF).