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Liquidity regulation, bank capital ratio, and interbank rate

Author

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  • Huang, Chao
  • Moreira, Fernando

Abstract

We study the impact of the Basel III liquidity coverage ratio (LCR) on bank capital ratio and the interbank rate in a traditional banking model. We find that inappropriate parameters assigned to calculate High-Quality Liquid Assets (HQLAs) and Net Cash Flows (NCOs) would lower the equilibrium capital ratio especially when the required liquidity ratio is strengthened. In addition, these regulatory parameters may have macro-prudential effects to steer the interbank rate.

Suggested Citation

  • Huang, Chao & Moreira, Fernando, 2024. "Liquidity regulation, bank capital ratio, and interbank rate," Economics Letters, Elsevier, vol. 242(C).
    • Handle: RePEc:eee:ecolet:v:242:y:2024:i:c:s0165176524003379
    DOI: 10.1016/j.econlet.2024.111853
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    More about this item

    Keywords

    Liquidity requirements; Bank stability; Basel accords; Bank capital; Interbank markets;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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