Staff Reports
The Costs and Benefits of Liquidity Regulations
Previous titles: “Bank Liquidity Provision and Basel Liquidity Regulations”; “Bank Liquidity Creation, Systemic Risk, and Basel Liquidity Regulations”
Number 852
June 2018 Revised February 2022

JEL classification: G01, G21, G28

Authors: Daniel Roberts, Asani Sarkar, and Or Shachar

We find that, relative to other banks, those subject to the Liquidity Coverage Ratio (LCR) reduce lending and liquidity creation but also contribute less to fire-sale externalities. For large LCR banks, we estimate the total after-tax benefits of reduced fire-sale risk (net of the costs associated with foregone lending) exceed $50 billion from 2013:Q2 to 2017. Further, non-LCR banks increase their lending and liquidity creation substantially, such that the average bank lends more and creates an equivalent amount of liquidity per dollar of assets following LCR. Our findings highlight the migration of liquidity creation activities from regulated to unregulated banks.

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AUTHOR DISCLOSURE STATEMENT(S)
Daniel Roberts
The author declares that he has no relevant or material financial interests that relate to the research described in this paper.

Asani Sarkar
The author declares that he has no relevant or material financial interests that relate to the research described in this paper.

Or Shachar
The author declares that she has no relevant or material financial interests that relate to the research described in this paper.
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