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 June 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 LCR banks, we estimate that 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, mostly accruing to the largest LCR banks. Non-LCR regulations enacted during our sample period cannot fully account for these findings. Our results highlight the trade-off between liquidity creation and resilience arising from liquidity regulations, and how it varies for banks of different sizes.

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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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