ECB Publishes Paper Examining Costs and Benefits of Liquidity Rules
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
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Nicolas Degruson
Works with financial institutions, regulatory experts, business analysts, product managers, and software engineers to drive regulatory solutions across the globe.
Patrycja Oleksza
Applies proficiency and knowledge to regulatory capital and reporting analysis and coordinates business and product strategies in the banking technology area
Previous Article
FCA Consults on Handbook Changes Related to European MMF RegulationRelated Articles
BIS and Central Banks Experiment with GenAI to Assess Climate Risks
A recent report from the Bank for International Settlements (BIS) Innovation Hub details Project Gaia, a collaboration between the BIS Innovation Hub Eurosystem Center and certain central banks in Europe
Nearly 25% G-SIBs Commit to Adopting TNFD Nature-Related Disclosures
Nature-related risks are increasing in severity and frequency, affecting businesses, capital providers, financial systems, and economies.
Singapore to Mandate Climate Disclosures from FY2025
Singapore recently took a significant step toward turning climate ambition into action, with the introduction of mandatory climate-related disclosures for listed and large non-listed companies
SEC Finalizes Climate-Related Disclosures Rule
The U.S. Securities and Exchange Commission (SEC) has finalized the long-awaited rule that mandates climate-related disclosures for domestic and foreign publicly listed companies in the U.S.
EBA Proposes Standards Related to Standardized Credit Risk Approach
The European Banking Authority (EBA) has been taking significant steps toward implementing the Basel III framework and strengthening the regulatory framework for credit institutions in the EU
US Regulators Release Stress Test Scenarios for Banks
The U.S. regulators recently released baseline and severely adverse scenarios, along with other details, for stress testing the banks in 2024. The relevant U.S. banking regulators are the Federal Reserve Bank (FED), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
Asian Governments Aim for Interoperability in AI Governance Frameworks
The regulatory landscape for artificial intelligence (AI), including the generative kind, is evolving rapidly, with governments and regulators aiming to address the challenges and opportunities presented by this transformative technology.
EBA Proposes Operational Risk Standards Under Final Basel III Package
The European Union (EU) has been working on the final elements of Basel III standards, with endorsement of the Banking Package and the publication of the European Banking Authority (EBA) roadmap on Basel III implementation in December 2023.
EFRAG Proposes XBRL Taxonomy and Standard for Listed SMEs Under ESRS
The European Financial Reporting Advisory Group (EFRAG), which plays a crucial role in shaping corporate reporting standards in European Union (EU), is seeking comments, until May 21, 2024, on the Exposure Draft ESRS for listed SMEs.
ECB to Expand Climate Change Work in 2024-2025
Banking regulators worldwide are increasingly focusing on addressing, monitoring, and supervising the institutions' exposure to climate and environmental risks.