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June 2018 Revised January 2023
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) tighten lending standards and reduce lending and liquidity creation but also contribute less to fire-sale externalities. For 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 the second quarter of 2013 to 2017, mostly accruing to the largest LCR banks. Non-LCR regulations enacted during our sample period cannot fully account for these findings. For the banking sector as a whole, lending migrates to smaller, non-LCR banks so that lending shares increase but fire-sale risk does not decrease. Our results highlight the trade-off between liquidity creation and resilience arising from liquidity regulations for banks of different sizes.
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.
