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.
|Place of Publication||Tilburg|
|Number of pages||29|
|Publication status||Published - 2012|
|Name||CentER Discussion Paper|
- Monetary Policy
- Interbank Market
- Basel 3