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What drives the liquidity of sovereign bonds when markets are under stress? An assessment of the new Basel 3 rules on bank liquid assets

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  • Petrella, Giovanni
  • Resti, Andrea

Abstract

The new rules on bank liquidity set by the Basel Committee require banks to hold high-quality liquid assets (HQLAs) against future cash outflows in periods of market stress. Domestic government bonds are considered to be HQLAs. To assess the appropriateness of this rule, we investigate the liquidity of European government bonds in ordinary times and in periods of market turmoil. We find that the effect of adverse market conditions on liquidity strongly depends on individual bond’s characteristics. Our evidence argues for rules on HQLAs that should constrain the eligibility of government bonds depending on their characteristics (primarily, duration and rating).

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  • Petrella, Giovanni & Resti, Andrea, 2017. "What drives the liquidity of sovereign bonds when markets are under stress? An assessment of the new Basel 3 rules on bank liquid assets," Journal of Financial Stability, Elsevier, vol. 33(C), pages 297-310.
    • Handle: RePEc:eee:finsta:v:33:y:2017:i:c:p:297-310
    DOI: 10.1016/j.jfs.2016.07.018
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    6. Jopp, Tobias A., 2020. "The determinants of sovereign bond liquidity during WWI," Economics Letters, Elsevier, vol. 196(C).
    7. Douglas da Rosa München & Herbert Kimura, 2020. "Regulatory Banking Leverage: what do you know?," Working Papers Series 540, Central Bank of Brazil, Research Department.

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    More about this item

    Keywords

    Liquidity risk; Liquidity coverage ratio; High-quality liquid assets (HQLAs); Basel 3; Basel committee;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G19 - Financial Economics - - General Financial Markets - - - Other
    • G29 - Financial Economics - - Financial Institutions and Services - - - Other

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