IDEAS home Printed from https://ideas.repec.org/a/taf/eurjfi/v29y2023i14p1678-1703.html
   My bibliography  Save this article

Bank liquidity and capital shocks in unconventional times

Author

Listed:
  • Aleksandra Baros
  • Ettore Croci
  • Viktor Elliot
  • Magnus Willesson

Abstract

This paper examines bank liquidity management following capital shocks under capital and liquidity regulation in a period of unconventional monetary policies. Studying European banks between 2010 and 2018, we find that bank liquidity is generally not affected by a negative capital shock. Capital shocks are nevertheless transmitted into liquidity positions through balance sheet adjustments. Addressing bank-level balance sheet policies, we find that the banks de-risk assets by replacing corporate loans with financial securities, especially if the shock takes place during periods of heightened central bank interventions. Moreover, asset-side-dominant risk-reducing behavior goes against regulatory intent and indicates that regulatory arbitrage considerations affect banks’ responses to shocks. Finally, we document heterogeneous responses by banks depending on their size, type, and country. These findings imply that compliance with regulation may lead to partial shortages in corporate lending, with banks prioritizing investment in government securities in event of a capital shock.

Suggested Citation

  • Aleksandra Baros & Ettore Croci & Viktor Elliot & Magnus Willesson, 2023. "Bank liquidity and capital shocks in unconventional times," The European Journal of Finance, Taylor & Francis Journals, vol. 29(14), pages 1678-1703, September.
    • Handle: RePEc:taf:eurjfi:v:29:y:2023:i:14:p:1678-1703
    DOI: 10.1080/1351847X.2022.2146521
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1080/1351847X.2022.2146521
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1080/1351847X.2022.2146521?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:eurjfi:v:29:y:2023:i:14:p:1678-1703. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/REJF20 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.