Banks Liquidity Buffers and the Role of Liquidity Regulation - - PowerPoint PPT Presentation

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Banks Liquidity Buffers and the Role of Liquidity Regulation - - PowerPoint PPT Presentation

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Introduction Background Methodology Findings Conclusion Banks Liquidity Buffers and the Role of Liquidity Regulation Clemens Bonner De Nederlandsche Bank joint with Iman van Lelyveld (DNB, BIS) and Robert Zymek (University of Edinburgh)

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SLIDE 1

Introduction Background Methodology Findings Conclusion

Banks’ Liquidity Buffers and the Role of Liquidity Regulation

Clemens Bonner

De Nederlandsche Bank joint with Iman van Lelyveld (DNB, BIS) and Robert Zymek (University of Edinburgh)

EBA Seminar, 14/15 November 2013

Views expressed are not necessarily those of DNB or the BIS

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SLIDE 2

Introduction Background Methodology Findings Conclusion

Purpose

  • Assess the determinants of banks’ liquidity holdings
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SLIDE 3

Introduction Background Methodology Findings Conclusion

Purpose

  • Assess the determinants of banks’ liquidity holdings
  • Highlight whether liquidity regulation substitutes or complements

banks’ incentives to hold liquid assets

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SLIDE 4

Introduction Background Methodology Findings Conclusion

Purpose

  • Assess the determinants of banks’ liquidity holdings
  • Highlight whether liquidity regulation substitutes or complements

banks’ incentives to hold liquid assets

  • Focus: Disclosure, Concentration, Business Model, DGS, Size
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SLIDE 5

Introduction Background Methodology Findings Conclusion

Motivation

  • (International) efforts to establish or reform (existing) liquidity risk

frameworks

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SLIDE 6

Introduction Background Methodology Findings Conclusion

Motivation

  • (International) efforts to establish or reform (existing) liquidity risk

frameworks

  • Especially introduction of Basel 3 Liquidity Coverage Ratio (LCR)

and Net Stable Funding Ratio (NSFR)

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SLIDE 7

Introduction Background Methodology Findings Conclusion

Motivation

  • (International) efforts to establish or reform (existing) liquidity risk

frameworks

  • Especially introduction of Basel 3 Liquidity Coverage Ratio (LCR)

and Net Stable Funding Ratio (NSFR)

  • Little is known about determinants of banks’ liquidity holdings
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SLIDE 8

Introduction Background Methodology Findings Conclusion

Motivation

  • (International) efforts to establish or reform (existing) liquidity risk

frameworks

  • Especially introduction of Basel 3 Liquidity Coverage Ratio (LCR)

and Net Stable Funding Ratio (NSFR)

  • Little is known about determinants of banks’ liquidity holdings
  • First global study on the role of liquidity regulation
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SLIDE 9

Introduction Background Methodology Findings Conclusion

Liquidity Risk

  • Risk that a financial agent will be unable to meet obligations at a

reasonable cost as they come due

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Introduction Background Methodology Findings Conclusion

Liquidity Risk

  • Risk that a financial agent will be unable to meet obligations at a

reasonable cost as they come due

  • Banks manage their liquidity risk by maintaining a buffer of

market-liquid assets anticipating their depositors’ liquidity demands

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SLIDE 11

Introduction Background Methodology Findings Conclusion

Liquidity Risk

  • Risk that a financial agent will be unable to meet obligations at a

reasonable cost as they come due

  • Banks manage their liquidity risk by maintaining a buffer of

market-liquid assets anticipating their depositors’ liquidity demands

  • The determination of a bank’s optimal liquidity buffer involves a

trade off between self-insurance against liquidity risk and the returns from illiquid, higher-yielding assets

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SLIDE 12

Introduction Background Methodology Findings Conclusion

Liquidity Risk

  • Risk that a financial agent will be unable to meet obligations at a

reasonable cost as they come due

  • Banks manage their liquidity risk by maintaining a buffer of

market-liquid assets anticipating their depositors’ liquidity demands

  • The determination of a bank’s optimal liquidity buffer involves a

trade off between self-insurance against liquidity risk and the returns from illiquid, higher-yielding assets

  • Any observed factor that would be expected to lower (raise)

liquidity risk should reduce (increase) observed liquidity buffers.

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Introduction Background Methodology Findings Conclusion

Data

  • 1. Data coverage
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SLIDE 14

Introduction Background Methodology Findings Conclusion

Data

  • 1. Data coverage
  • 7000 banks
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Introduction Background Methodology Findings Conclusion

Data

  • 1. Data coverage
  • 7000 banks
  • 1998-2007
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SLIDE 16

Introduction Background Methodology Findings Conclusion

Data

  • 1. Data coverage
  • 7000 banks
  • 1998-2007
  • 24 OECD countries
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SLIDE 17

Introduction Background Methodology Findings Conclusion

Data

  • 1. Data coverage
  • 7000 banks
  • 1998-2007
  • 24 OECD countries
  • 2. Key variables
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SLIDE 18

Introduction Background Methodology Findings Conclusion

Data

  • 1. Data coverage
  • 7000 banks
  • 1998-2007
  • 24 OECD countries
  • 2. Key variables
  • Concentration of the banking sector
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SLIDE 19

Introduction Background Methodology Findings Conclusion

Data

  • 1. Data coverage
  • 7000 banks
  • 1998-2007
  • 24 OECD countries
  • 2. Key variables
  • Concentration of the banking sector
  • Deposit insurance coverage
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SLIDE 20

Introduction Background Methodology Findings Conclusion

Data

  • 1. Data coverage
  • 7000 banks
  • 1998-2007
  • 24 OECD countries
  • 2. Key variables
  • Concentration of the banking sector
  • Deposit insurance coverage
  • Disclosure Requirements
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SLIDE 21

Introduction Background Methodology Findings Conclusion

Data

  • 1. Data coverage
  • 7000 banks
  • 1998-2007
  • 24 OECD countries
  • 2. Key variables
  • Concentration of the banking sector
  • Deposit insurance coverage
  • Disclosure Requirements
  • Business models and size
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SLIDE 22

Introduction Background Methodology Findings Conclusion

Data

  • 1. Data coverage
  • 7000 banks
  • 1998-2007
  • 24 OECD countries
  • 2. Key variables
  • Concentration of the banking sector
  • Deposit insurance coverage
  • Disclosure Requirements
  • Business models and size
  • Liquidity Regulation
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SLIDE 23

Introduction Background Methodology Findings Conclusion

First look at the data

5 10 15

Liqudity: cash and due from banks, % of total assets

No Liquidity Regulation Liquidity Regulation

IS BE SE IT NZ GB FR IE AT CA LU JP NL AU PT CZ NO CH ES DE DK KR FI US GR TR PL HU MX IS GB FR IE LU NL DE KR TR excludes outside values

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SLIDE 24

Introduction Background Methodology Findings Conclusion

First look at the data

5 10 15

Liqudity: cash and due from banks, % of total assets

No Liquidity Regulation Liquidity Regulation

IS BE SE IT NZ GB FR IE AT CA LU JP NL AU PT CZ NO CH ES DE DK KR FI US GR TR PL HU MX IS GB FR IE LU NL DE KR TR excludes outside values

  • Share of cash and due from other banks relative to total assets
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SLIDE 25

Introduction Background Methodology Findings Conclusion

First look at the data

5 10 15

Liqudity: cash and due from banks, % of total assets

No Liquidity Regulation Liquidity Regulation

IS BE SE IT NZ GB FR IE AT CA LU JP NL AU PT CZ NO CH ES DE DK KR FI US GR TR PL HU MX IS GB FR IE LU NL DE KR TR excludes outside values

  • Share of cash and due from other banks relative to total assets
  • Liquidity requirement does not imply higher liquidity buffers but lower volatility
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SLIDE 26

Introduction Background Methodology Findings Conclusion

First look at the data

5 10 15

Liqudity: cash and due from banks, % of total assets

No Liquidity Regulation Liquidity Regulation

IS BE SE IT NZ GB FR IE AT CA LU JP NL AU PT CZ NO CH ES DE DK KR FI US GR TR PL HU MX IS GB FR IE LU NL DE KR TR excludes outside values

  • Share of cash and due from other banks relative to total assets
  • Liquidity requirement does not imply higher liquidity buffers but lower volatility
  • Banks in smaller countries and less used currencies have larger liquidity buffers
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Introduction Background Methodology Findings Conclusion

Empirical model

∆Liquiditybct =β0+

β1Bankbct

+

β2Contextct

+

β3Macroct

+

β4FinDepct

+ǫbt

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SLIDE 28

Introduction Background Methodology Findings Conclusion

Empirical model

∆Liquiditybct =β0+

β1Bankbct

+

β2Contextct

+

β3Macroct

+

β4FinDepct

+ǫbt

  • Liquidity variable
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SLIDE 29

Introduction Background Methodology Findings Conclusion

Empirical model

∆Liquiditybct =β0+

β1Bankbct

+

β2Contextct

+

β3Macroct

+

β4FinDepct

+ǫbt

  • Liquidity variable
  • Bank: Profit, Size, Deposits, Capital
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SLIDE 30

Introduction Background Methodology Findings Conclusion

Empirical model

∆Liquiditybct =β0+

β1Bankbct

+

β2Contextct

+

β3Macroct

+

β4FinDepct

+ǫbt

  • Liquidity variable
  • Bank: Profit, Size, Deposits, Capital
  • Context: Concentration, Disclosure, DGS, Business Model
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SLIDE 31

Introduction Background Methodology Findings Conclusion

Empirical model

∆Liquiditybct =β0+

β1Bankbct

+

β2Contextct

+

β3Macroct

+

β4FinDepct

+ǫbt

  • Liquidity variable
  • Bank: Profit, Size, Deposits, Capital
  • Context: Concentration, Disclosure, DGS, Business Model
  • Macro: Interest rates, GDP growth, inflation etc.
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SLIDE 32

Introduction Background Methodology Findings Conclusion

Empirical model

∆Liquiditybct =β0+

β1Bankbct

+

β2Contextct

+

β3Macroct

+

β4FinDepct

+ǫbt

  • Liquidity variable
  • Bank: Profit, Size, Deposits, Capital
  • Context: Concentration, Disclosure, DGS, Business Model
  • Macro: Interest rates, GDP growth, inflation etc.
  • FinDep: financial openess, stockmarket capitalization etc.
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SLIDE 33

Introduction Background Methodology Findings Conclusion

Empirical model

∆Liquiditybct =β0+

β1Bankbct

+

β2Contextct

+

β3Macroct

+

β4FinDepct

+ǫbt

  • Liquidity variable
  • Bank: Profit, Size, Deposits, Capital
  • Context: Concentration, Disclosure, DGS, Business Model
  • Macro: Interest rates, GDP growth, inflation etc.
  • FinDep: financial openess, stockmarket capitalization etc.
  • Year and country dummies
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Introduction Background Methodology Findings Conclusion

Liquidity Holdings and Size

Table 1: Banks’ Liquidity Holdings under different regulatory Regimes (Part 1)

n

  • i

t a l u g e R n

  • i

t a l u g e R

  • N

l l A VARIABLES (1) (2) (3) (4) (5) (6) (7) (8) (9) Cooperative Bank

  • 0.22***
  • 0.22***
  • 0.24***
  • 0.45***
  • 0.45***
  • 0.49***

0.14 0.15 0.21*

(0.08) (0.08) (0.08) (0.15) (0.15) (0.15) (0.12) (0.12) (0.12)

Cooperative*Size 0.14 0.39 0.56 1.99

  • 0.03
  • 1.88*

(0.38) (0.93) (1.30) (2.50) (0.28) (1.03)

Cooperative*Size2 * 1 7 . 6 9 .

  • 1

1 .

  • )

6 3 . ( ) 1 2 . 2 ( ) 6 3 . (

Investment Bank

  • 0.42
  • 0.51
  • 0.32
  • 0.74**
  • 0.37
  • 0.23

0.83 0.80 1.16

(0.35) (0.39) (0.45) (0.37) (0.50) (0.62) (0.79) (0.91) (1.03)

Investment*Size 1.03

  • 2.62
  • 7.31*
  • 14.30

0.18

  • 5.27

(0.85) (2.70) (3.84) (10.68) (0.92) (3.46)

Investment*Size2 * * 7 3 . 3 5 6 . 5 3 * 1 7 . 2

) 1 7 . 1 ( ) 4 . 3 3 ( ) 9 4 . 1 (

Mortgage Bank

  • 1.77***
  • 1.79***
  • 1.95***
  • 0.88***
  • 0.64
  • 0.48
  • 1.36***
  • 1.38***
  • 1.46***

(0.15) (0.16) (0.18) (0.31) (0.44) (0.57) (0.22) (0.22) (0.24)

Mortgage*Size 0.80 10.16***

  • 13.32
  • 38.73

0.70 4.63

(1.26) (3.09) (13.01) (38.24) (0.56) (3.17)

Mortgage*Size2 7 8 . 5

  • 8

1 . 7 2 4 * * * 9 7 . 2 1

  • )

2 1 . 4 ( ) 2 5 . 5 7 4 ( ) 8 8 . 3 (

Savings Bank

  • 0.88***
  • 0.89***
  • 0.91***
  • 1.07***
  • 1.11***
  • 1.18***
  • 0.16
  • 0.15
  • 0.02

(0.08) (0.08) (0.09) (0.11) (0.11) (0.12) (0.12) (0.13) (0.14)

Savings*Size 0.68 0.26 4.87** 14.27***

  • 0.40
  • 9.09**

(0.59) (1.60) (2.08) (2.83) (0.88) (4.48)

Savings*Size2 * * 7 . 7 * * * 1 . 7 2

  • 2

2 . 1

) 9 4 . 3 ( ) 9 2 . 6 ( ) 3 . 1 (

Size 0.04

  • 0.01
  • 1.18***
  • 0.06
  • 0.10
  • 1.30*
  • 0.17
  • 0.17
  • 0.03

(0.28) (0.33) (0.40) (0.45) (0.47) (0.71) (0.16) (0.19) (0.66)

Size2 6 .

  • 6

5 . * * 5 .

) 2 2 . ( ) 2 4 . ( ) 1 2 . (

Observations 20160 20160 20160 10360 10360 10360 6486 6486 6486 R2 0.256 0.257 0.260 0.286 0.288 0.291 0.263 0.263 0.270

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Introduction Background Methodology Findings Conclusion

Liquidity Holdings and Contextual Factors

Table 1: Banks’ Liquidity Holdings under different regulatory Regimes (Part 2)

All No Regulation Regulation VARIABLES (1) (2) (3) (4) (5) (6) (7) (8) (9) Profit 0.26*** 0.26*** 0.25*** 0.31*** 0.30*** 0.30*** 0.09 0.09 0.09

(0.04) (0.04) (0.04) (0.05) (0.05) (0.05) (0.08) (0.08) (0.08)

Capital ratio (%) 0.00 0.00

  • 0.00
  • 0.00
  • 0.00
  • 0.00
  • 0.01
  • 0.01
  • 0.01

(0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.01) (0.01) (0.01)

Deposits 0.02*** 0.02*** 0.02*** 0.02*** 0.02*** 0.02*** 0.00 0.00 0.00

(0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00)

Disclosure 0.06*** 0.06*** 0.06***

  • 0.01
  • 0.01
  • 0.00

0.08*** 0.08*** 0.08***

(0.01) (0.01) (0.01) (0.01) (0.01) (0.01) (0.03) (0.03) (0.03)

Concentration

  • 0.01***
  • 0.01***
  • 0.01***
  • 0.01***
  • 0.01***
  • 0.01***
  • 0.00
  • 0.00
  • 0.01

(0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.01) (0.01) (0.01)

DGS

  • 0.00
  • 0.00
  • 0.00

0.00 0.00* 0.00*

  • 0.00**
  • 0.00**
  • 0.00*

(0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00)

Observations 20160 20160 20160 10360 10360 10360 6486 6486 6486 R2 0.256 0.257 0.260 0.286 0.288 0.291 0.263 0.263 0.270

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SLIDE 36

Introduction Background Methodology Findings Conclusion

Main Findings

  • 1. Determinants of banks’ liquidity holdings
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SLIDE 37

Introduction Background Methodology Findings Conclusion

Main Findings

  • 1. Determinants of banks’ liquidity holdings
  • Bank: Deposits (+), Profit (+), Size (x), Capital (x)
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SLIDE 38

Introduction Background Methodology Findings Conclusion

Main Findings

  • 1. Determinants of banks’ liquidity holdings
  • Bank: Deposits (+), Profit (+), Size (x), Capital (x)
  • Business Model: Savings (-), Investment (x), Corporate (-),

Mortgage (-)

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SLIDE 39

Introduction Background Methodology Findings Conclusion

Main Findings

  • 1. Determinants of banks’ liquidity holdings
  • Bank: Deposits (+), Profit (+), Size (x), Capital (x)
  • Business Model: Savings (-), Investment (x), Corporate (-),

Mortgage (-)

  • Contextual: Concentration (-), Disclosure (+), DGS (x)
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SLIDE 40

Introduction Background Methodology Findings Conclusion

Main Findings

  • 1. Determinants of banks’ liquidity holdings
  • Bank: Deposits (+), Profit (+), Size (x), Capital (x)
  • Business Model: Savings (-), Investment (x), Corporate (-),

Mortgage (-)

  • Contextual: Concentration (-), Disclosure (+), DGS (x)
  • 2. Effects of liquidity regulation:
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SLIDE 41

Introduction Background Methodology Findings Conclusion

Main Findings

  • 1. Determinants of banks’ liquidity holdings
  • Bank: Deposits (+), Profit (+), Size (x), Capital (x)
  • Business Model: Savings (-), Investment (x), Corporate (-),

Mortgage (-)

  • Contextual: Concentration (-), Disclosure (+), DGS (x)
  • 2. Effects of liquidity regulation:
  • Substitutes almost all bank- and country specific determinants
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SLIDE 42

Introduction Background Methodology Findings Conclusion

Main Findings

  • 1. Determinants of banks’ liquidity holdings
  • Bank: Deposits (+), Profit (+), Size (x), Capital (x)
  • Business Model: Savings (-), Investment (x), Corporate (-),

Mortgage (-)

  • Contextual: Concentration (-), Disclosure (+), DGS (x)
  • 2. Effects of liquidity regulation:
  • Substitutes almost all bank- and country specific determinants
  • Complements disclosure
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SLIDE 43

Introduction Background Methodology Findings Conclusion

Main Findings

  • 1. Determinants of banks’ liquidity holdings
  • Bank: Deposits (+), Profit (+), Size (x), Capital (x)
  • Business Model: Savings (-), Investment (x), Corporate (-),

Mortgage (-)

  • Contextual: Concentration (-), Disclosure (+), DGS (x)
  • 2. Effects of liquidity regulation:
  • Substitutes almost all bank- and country specific determinants
  • Complements disclosure
  • Causes a non-linear effect of size
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SLIDE 44

Introduction Background Methodology Findings Conclusion

Sensitivity

  • 1. Different liquidity regulation variable
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SLIDE 45

Introduction Background Methodology Findings Conclusion

Sensitivity

  • 1. Different liquidity regulation variable
  • 2. Lagged variables
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SLIDE 46

Introduction Background Methodology Findings Conclusion

Sensitivity

  • 1. Different liquidity regulation variable
  • 2. Lagged variables
  • 3. Fixed and random effects
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SLIDE 47

Introduction Background Methodology Findings Conclusion

Sensitivity

  • 1. Different liquidity regulation variable
  • 2. Lagged variables
  • 3. Fixed and random effects
  • 4. To do: Different liquidity variables
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SLIDE 48

Introduction Background Methodology Findings Conclusion

Conclusion

  • Findings
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SLIDE 49

Introduction Background Methodology Findings Conclusion

Conclusion

  • Findings
  • Determinants of banks’ liquidity buffers is a combination of bank-

and country-specific factors

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SLIDE 50

Introduction Background Methodology Findings Conclusion

Conclusion

  • Findings
  • Determinants of banks’ liquidity buffers is a combination of bank-

and country-specific factors

  • Liquidity regulation substitutes most of these factors
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SLIDE 51

Introduction Background Methodology Findings Conclusion

Conclusion

  • Findings
  • Determinants of banks’ liquidity buffers is a combination of bank-

and country-specific factors

  • Liquidity regulation substitutes most of these factors
  • Liquidity regulation makes disclosure more important: Complement
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SLIDE 52

Introduction Background Methodology Findings Conclusion

Conclusion

  • Findings
  • Determinants of banks’ liquidity buffers is a combination of bank-

and country-specific factors

  • Liquidity regulation substitutes most of these factors
  • Liquidity regulation makes disclosure more important: Complement
  • Policy Implication
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SLIDE 53

Introduction Background Methodology Findings Conclusion

Conclusion

  • Findings
  • Determinants of banks’ liquidity buffers is a combination of bank-

and country-specific factors

  • Liquidity regulation substitutes most of these factors
  • Liquidity regulation makes disclosure more important: Complement
  • Policy Implication
  • When harmonizing liquidity regulation, disclosure requirements

need to be harmonized as well

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SLIDE 54

Introduction Background Methodology Findings Conclusion

Conclusion

  • Findings
  • Determinants of banks’ liquidity buffers is a combination of bank-

and country-specific factors

  • Liquidity regulation substitutes most of these factors
  • Liquidity regulation makes disclosure more important: Complement
  • Policy Implication
  • When harmonizing liquidity regulation, disclosure requirements

need to be harmonized as well

  • Non-linear effect of size indicates bias towards large institutions
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SLIDE 55

Introduction Background Methodology Findings Conclusion

Thank you