The Effects of Liquidity Regulation on Bank Assets and Liabilities

Under Basel III rules, banks become subject to a liquidity coverage ratio (LCR) from 2015 onwards, to promote short-term resilience. We investigate the effects of such liquidity regulation on bank liquid assets and liabilities. Results indicate co-integration of liquid assets and liabilities, to maintain a minimum short-term liquidity buffer. Still, microprudential regulation has not prevented an aggregate liquidity cycle characterised by a pro-cyclical pattern in the size of balance sheets and risk taking. Our error correction regressions indicate that adjustment in the liquidity ratio is balanced towards the liability side, especially when the liquidity ratio is below its long-term equilibrium. This finding contrasts established wisdom that the LCR is mainly driven by changes in liquid assets. Policy implications focus on the need to complement microprudential regulation with a macroprudential approach. This involves monitoring of aggregate liquid assets and liabilities and addressing pro-cyclical behaviour by restricting leverage

Macroprudential supervision: from theory to policy. Bruegel Working Paper 2015/15, November 2015

While there is now consensus that financial supervision has to focus on the aggregate (macroprudential), in addition to the individual (microprudential), there is no agreed macroprudential framework for measuring financial imbalances and applying policies to correct such imbalances. This paper focuses on these two open questions in the so-called time dimension of macroprudential policy

Macroprudential Supervision

Financial supervision focuses on the aggregate (macroprudential) in addition to the individual (microprudential). But an agreed framework for measuring and addressing financial imbalances is lacking. We propose a holistic approach for the financial system as a whole, beyond banking. Building on our model of financial amplification, the financial cycle is the key variable for measuring financial imbalances. The cycle can be curbed by leverage restrictions that might vary across countries. We make concrete policy proposals for the design of macroprudential instruments to simplify the current framework and make it more consistent

Macro-economische beleidscoördinatie

Binnen de EMU is een roep om sterkere afstemming van het budgettaire beleid te horen. De omvang van de externe effecten van decentraal beleid rechtvaardigt zulke coördinatie echter niet. Ook afstemmingsproblemen en onenigheid over het model waarop gecoördineerd beleid zou moeten worden afgestemd pleiten tegen coördinatie die verder gaat dan wat reeds in het Stabiliteitspact is vastgelegd