The Impact of the LCR on the Interbank Money Market

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Abstract

This paper analyses the impact of the Basel 3 Liquidity Coverage Ratio (LCR) on the unsecured interbank money market and therefore on the implementation of monetary policy. Combining two unique datasets, we show that banks which are just above/below their short-term regulatory liquidity requirement pay and charge higher interest rates for unsecured interbank loans. The effect is larger for longer maturities and increases after the failure of Lehman Brothers. During a crisis, being close to the minimum liquidity requirement induces banks to decrease lending volumes. Given the high importance of a well-functioning interbank money market, our results suggest that the current design of the LCR is likely to dampen the effectiveness of monetary policy.
Original languageEnglish
Place of PublicationTilburg
PublisherEBC
Number of pages29
Volume2012-019
Publication statusPublished - 2012

Publication series

NameEBC Discussion Paper
Volume2012-019

Fingerprint

Liquidity
Money market
Monetary policy
Loans
Functioning
Maturity
Interest rates
Lending
Basel
Charge

Keywords

  • Monetary Policy
  • Interbank Market
  • Basel 3

Cite this

Bonner, C., & Eijffinger, S. C. W. (2012). The Impact of the LCR on the Interbank Money Market. (EBC Discussion Paper; Vol. 2012-019). Tilburg: EBC.
Bonner, C. ; Eijffinger, S.C.W. / The Impact of the LCR on the Interbank Money Market. Tilburg : EBC, 2012. (EBC Discussion Paper).
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Bonner, C & Eijffinger, SCW 2012 'The Impact of the LCR on the Interbank Money Market' EBC Discussion Paper, vol. 2012-019, EBC, Tilburg.

The Impact of the LCR on the Interbank Money Market. / Bonner, C.; Eijffinger, S.C.W.

Tilburg : EBC, 2012. (EBC Discussion Paper; Vol. 2012-019).

Research output: Working paperDiscussion paperOther research output

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N2 - This paper analyses the impact of the Basel 3 Liquidity Coverage Ratio (LCR) on the unsecured interbank money market and therefore on the implementation of monetary policy. Combining two unique datasets, we show that banks which are just above/below their short-term regulatory liquidity requirement pay and charge higher interest rates for unsecured interbank loans. The effect is larger for longer maturities and increases after the failure of Lehman Brothers. During a crisis, being close to the minimum liquidity requirement induces banks to decrease lending volumes. Given the high importance of a well-functioning interbank money market, our results suggest that the current design of the LCR is likely to dampen the effectiveness of monetary policy.

AB - This paper analyses the impact of the Basel 3 Liquidity Coverage Ratio (LCR) on the unsecured interbank money market and therefore on the implementation of monetary policy. Combining two unique datasets, we show that banks which are just above/below their short-term regulatory liquidity requirement pay and charge higher interest rates for unsecured interbank loans. The effect is larger for longer maturities and increases after the failure of Lehman Brothers. During a crisis, being close to the minimum liquidity requirement induces banks to decrease lending volumes. Given the high importance of a well-functioning interbank money market, our results suggest that the current design of the LCR is likely to dampen the effectiveness of monetary policy.

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Bonner C, Eijffinger SCW. The Impact of the LCR on the Interbank Money Market. Tilburg: EBC. 2012. (EBC Discussion Paper).