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
Introduction Background Methodology Findings Conclusion Purpose • Assess the determinants of banks’ liquidity holdings
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
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
Introduction Background Methodology Findings Conclusion Motivation • (International) efforts to establish or reform (existing) liquidity risk frameworks
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)
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
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
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
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
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
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.
Introduction Background Methodology Findings Conclusion Data 1. Data coverage
Introduction Background Methodology Findings Conclusion Data 1. Data coverage • 7000 banks
Introduction Background Methodology Findings Conclusion Data 1. Data coverage • 7000 banks • 1998-2007
Introduction Background Methodology Findings Conclusion Data 1. Data coverage • 7000 banks • 1998-2007 • 24 OECD countries
Introduction Background Methodology Findings Conclusion Data 1. Data coverage • 7000 banks • 1998-2007 • 24 OECD countries 2. Key variables
Introduction Background Methodology Findings Conclusion Data 1. Data coverage • 7000 banks • 1998-2007 • 24 OECD countries 2. Key variables • Concentration of the banking sector
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
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
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
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
Introduction Background Methodology Findings Conclusion First look at the data 15 Liqudity: cash and due from banks, % of total assets 10 5 0 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 No Liquidity Regulation Liquidity Regulation excludes outside values
Introduction Background Methodology Findings Conclusion First look at the data 15 Liqudity: cash and due from banks, % of total assets 10 5 0 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 No Liquidity Regulation Liquidity Regulation excludes outside values • Share of cash and due from other banks relative to total assets
Introduction Background Methodology Findings Conclusion First look at the data 15 Liqudity: cash and due from banks, % of total assets 10 5 0 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 No Liquidity Regulation Liquidity Regulation 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
Introduction Background Methodology Findings Conclusion First look at the data 15 Liqudity: cash and due from banks, % of total assets 10 5 0 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 No Liquidity Regulation Liquidity Regulation 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
Introduction Background Methodology Findings Conclusion Empirical model ∆ Liquidity bct = β 0 + β 1 Bank bct + β 2 Context ct + β 3 Macro ct + β 4 FinDep ct + ǫ bt
Introduction Background Methodology Findings Conclusion Empirical model ∆ Liquidity bct = β 0 + β 1 Bank bct + β 2 Context ct + β 3 Macro ct + β 4 FinDep ct + ǫ bt • Liquidity variable
Introduction Background Methodology Findings Conclusion Empirical model ∆ Liquidity bct = β 0 + β 1 Bank bct + β 2 Context ct + β 3 Macro ct + β 4 FinDep ct + ǫ bt • Liquidity variable • Bank: Profit, Size, Deposits, Capital
Introduction Background Methodology Findings Conclusion Empirical model ∆ Liquidity bct = β 0 + β 1 Bank bct + β 2 Context ct + β 3 Macro ct + β 4 FinDep ct + ǫ bt • Liquidity variable • Bank: Profit, Size, Deposits, Capital • Context: Concentration, Disclosure, DGS, Business Model
Introduction Background Methodology Findings Conclusion Empirical model ∆ Liquidity bct = β 0 + β 1 Bank bct + β 2 Context ct + β 3 Macro ct + β 4 FinDep ct + ǫ bt • Liquidity variable • Bank: Profit, Size, Deposits, Capital • Context: Concentration, Disclosure, DGS, Business Model • Macro: Interest rates, GDP growth, inflation etc.
Introduction Background Methodology Findings Conclusion Empirical model ∆ Liquidity bct = β 0 + β 1 Bank bct + β 2 Context ct + β 3 Macro ct + β 4 FinDep ct + ǫ bt • 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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