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Bank Liquidity Regulation and Risk

Author

Listed:
  • Foly Ananou

    (LAPE - Laboratoire d'Analyse et de Prospective Economique - GIO - Gouvernance des Institutions et des Organisations - UNILIM - Université de Limoges)

  • Dimitris Chronopoulos

    (University of St Andrews, Centre for Responsible Banking & Finance, Gateway Building, St Andrews, Fife KY16 9RJ, UK)

  • Amine Tarazi

    (LAPE - Laboratoire d'Analyse et de Prospective Economique - GIO - Gouvernance des Institutions et des Organisations - UNILIM - Université de Limoges)

  • John O S Wilson

    (University of St Andrews, Centre for Responsible Banking & Finance, Gateway Building, St Andrews, Fife KY16 9RJ, UK)

Abstract

We investigate the impact of liquidity requirements on bank risk. Using the Netherlands as a setting, we investigate the impact of the 2003 liquidity balance rule (LBR) on individual bank default risk and systemic risk. Using the differential regulatory treatment of Dutch and other Eurozone banks (that were not subject to the LBR) to overcome identification concerns, we find that following the introduction of the LBR, the individual risk and systemic risk of Dutch banks declines relative to unaffected counterparts. The observed decline in risk is at the expense of lower profitability (driven by a decline in interest income), which is not offset by the lower funding costs of treated banks following the enactment of the LBR. Our findings also suggest that better financing conditions allow Dutch banks to increase the balance sheet shares of deposits and capital.

Suggested Citation

  • Foly Ananou & Dimitris Chronopoulos & Amine Tarazi & John O S Wilson, 2024. "Bank Liquidity Regulation and Risk," Working Papers hal-04574311, HAL.
    • Handle: RePEc:hal:wpaper:hal-04574311
    Note: View the original document on HAL open archive server: https://unilim.hal.science/hal-04574311
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