We assess the determinants of banks’ liquidity holdings using data for nearly 7000 banks from 25 OECD countries. We highlight the role of several bank-specific, institutional and policy variables in shaping banks’ liquidity risk management. Our main question is whether liquidity regulation neutralizes banks’ incentives to hold liquid assets. Without liquidity regulation, the determinants of banks’ liquidity buffers are a combination of bank-specific and country-specific variables. While most incentives are neutralized by liquidity regulation, a bank’s disclosure requirements remain important. The complementarity of disclosure and liquidity requirements provides a strong rationale for considering them jointly in the design of regulation.
This is a preview of subscription content, access via your institution.
Buy single article
Instant access to the full article PDF.
Tax calculation will be finalised during checkout.
Subscribe to journal
Immediate online access to all issues from 2019. Subscription will auto renew annually.
Tax calculation will be finalised during checkout.
See ESRB (2013).
See Drehmann and Nikolaou (2009).
See Brunnermeier (2009).
Please note that even non-binding liquidity requirement is likely to change banks’ relative incentives to hold certain assets.
See Gennaioli et al. (2014) who provide a similar argumentation for banks’ reserve requirements.
The largest difference regarding central bank reserves stems from the treatment of the minimum reserves banks are required to deposit at the central bank. While some jurisdictions allow banks to add minimum reserves in full to their liquidity buffer, other jurisdictions only allow reserves in excess of the reserve requirement. Since the dataset does not distinguishing the two types of reserves, central bank reserves are not considered part of banks’ liquidity buffers.
Denominator definitions differ substantially across the various requirements. Requirements either do not include any weighting or show large differences regarding the treatment of institutions’ liabilities.
Also see Farag et al. (2013).
While there are certainly arguments in favor of incorporating the recent crisis period, we specifically decided against it. We are particularly interested in banks’ incentives to hold liquid assets during normal times as insurance against crises. Additionally taking into account a crisis period would weaken the explanatory power of our results as the “clean” incentive effect would be distorted by crisis related factors (e.g. actual government interventions). In Section 6 we do, however, discuss the development of liquidity holdings after 2007.
Please note that all findings reported below are robust to using the alternative Local GAAP accounting standard where possible.
The variable’s source is the World Bank’s World Development Indicators (WDI). See also Demirgüç-Kunt et al. (2005).
Given that some of the classifications might be arbitrary, we also use an alternative measure of liquidity regulation, based on the answers to a survey circulated in the BCBS Working Group on Liquidity (WGL). The results are qualitatively similar.
These variables include GDP growth, inflation, short- and long-term interest rates, stock market capitalization, government debt and financial openness.
Please note that this argument holds despite the fact that retail deposits are considered to be one of the most stable source of funding.
Note that the first indicator is not presented because there was extensive central bank support in all countries under analysis and therefore correlation coefficients cannot be calculated.
Agénor PR, Aizenman J, Hoffmaister AW (2004) The credit crunch in East Asia: what can bank excess liquid assets tell us? J Int Money Financ 23(1):27–49
Algorithmics (2007) Liquidity risk regulations
Almeida H, Campello M, Weisbach MS (2004) The cash flow sensitivity of cash. J Financ 59(4):1777–1804
Arellano M, Bond S (1991) Some tests of specification for panel data: Monte Carlo evidence and an application to employment equations. Rev Econ Stud 58(2):277–297
Arellano M, Bover O (1995) Another look at the instrumental variable estimation of error-components models. J Econ 68(1):29–51
Aspachs O, Nier E, Tiesset M (2005) Liquidity, banking regulation and the macroeconomy: evidence on bank liquidity holdings from a panel of UK-resident banks. Mimeo, pp 1–26
Baltensperger E (1980) Alternative approaches to the theory of the banking firm. J Monet Econ 6(1):1–37
Banerjee R, Hio M (2014) The impact of liquidity regulation on bank behaviour evidence from the UK
Barth JR, Caprio GJ, Levine R (2008) Bank regulations are changing: for better or worse? World Bank Policy Research Working Paper, 4646
BCBS (2008) Liquidity risk: management and supervisory challenges. Basel Committee on Banking Supervision
BCBS (2010) International framework for liquidity risk management, standards and monitoring. Basel Committee on Banking Supervision
BCBS (2013) Basel III: the liquidity coverage ratio and liquidity risk monitoring tools. Basel Committee on Banking Supervision
BCBS (2014) Liquidity coverage ratio disclosure standards. January 2014
BDF (1988) Regulation 88-01. Banque de France
Bech M, Keister T (2012) On the liquidity coverage ratio and monetary policy implementation. BIS Q Rev:49–61
Beck T, Demirgüç-Kunt A, Soledad Martinez Peria M (2006) Banking services for everyone? Barriers to bank access and use around the World. Policy Research Working Paper Series, 4079
BOE (2013) Liquidity and Capital regime for UK banks and building societies: adjustments in relation to interim PFC statement. Bank of England. Supervisory statement LSS4/13
Bonner C (2014) Preferential regulatory treatment and banks’ demand for government bonds. DNB Working Paper Series, 433
Bonner C, Eijffinger S (2013) The impact of liquidity regulation on financial intermediation. CEPR Discussion Paper, 9124
Brunnermeier MK (2009) Deciphering the liquidity and credit crunch 2007-2008. J Econ Perspect 23(1): 77–100
Bundesbank (2006) Regulation on the liquidity of institutions
CBI (2009) Requirements for the management of liquidity risk. Central Bank of Ireland
Chan Y, Greenbaum S, Thakor A (1992) Is fairly priced deposit insurance possible? J Financ 47:227–245
CSSF (2007) Circular CSSF 07/316. Commission de Surveillance du Secteur Financiers
De Haan L, van den End JW (2013) Bank liquidity, the maturity ladder, and regulation. J Bank Financ 37(10):3930–3950
De Haas R, Van Lelyveld I (2010) Internal Capital markets and lending by multinational bank subsidiaries. J Financ Intermed 19:1–25
De Haas R, Van Lelyveld I (2014) Multinational banks and the global financial crisis. Weathering the perfect storm? J Money Credit Bank 46(1):333–364
Delechat C, Henao C, Muthoora P, Vtyurina S (2012) The determinants of banks’ liquidity buffers in Central America. IMF Working Paper Series, WP/12/301
Demirgüç-Kunt A, Detragiache E (2002) Does deposit insurance increase banking system stability? An empirical investigation. J Monet Econ 49(7):1373–1406
Demirgüç-Kunt A, Karacaovali B, Laeven L (2005) Deposit insurance around the World: a comprehensive database. Policy Research Working Paper Series, 3628
Diamond DW, Dybvig PH (1983) Bank runs, deposit insurance, and liquidity. J Polit Econ 91(3):401–419
Dinger V (2009) Do foreign-owned banks affect banking system liquidity risk? J Comp Econ 37:647–657
DNB (2003) Regulation on liquidity under the Wft
Drehmann M, Nikolaou K (2009) Funding liquidity risk: definition and measurement. ECB Working Paper, 1024
ESRB (2013) Recommendation of the European systemic risk board of 20 December 2012 on funding of credit institutions. ESRB/2012/2
Farag M, Harland D, Nixon D (2013) Bank capital and liquidity. Bank of England Quarterly Bulletin, Q3
Flannery M (1989) Capital regulation and insured banks choice of individual loan default risks. J Monet Econ 24:235–258
Gennaioli N, Martin A, Rossi S (2013) Banks, government bonds, and default: what do the data say? IMF Working Papers, 14/120
Gennaioli N, Martin A, Rossi S (2014) Sovereign default, domestic banks, and financial institutions. J Financ 69(2):819–866
Hausman JA, Taylor WE (1981) Panel data and unobservable individual effects. Econometrica 49(6): 1377–1398
Huang R (2006), Bank disclosure index: global assessment of bank disclosure practices. World Bank Policy Research Working Paper
Jordan JS, Peek J, Rosengren ES (2000) The market reaction to the disclosure of supervisory actions: implications for bank transparency. J Financ Intermed 9(3):298–319
Kashyap AK, Rajan R, Stein JC (2002) Banks as liquidity providers: an explanation for the coexistence of lending and deposit-taking. J Financ 57(1):33
Kyle A (1985) Continuous auctions and insider trading. Econometrica 53(6):1315–1335
Laeven L, Valencia F (2013) Systemic banking crises database. IMF Econ Rev 61:225–270
Lee J (2013) Dealing with the challenges of macro financial linkages in emerging markets, chapter the operation of macro prudential policy measures. World Bank
Nickell S (1981) Biases in dynamic models with fixed effects. Econometrica 49(6):1417–1426
Nier E, Baumann U (2006) Market discipline, disclosure and moral hazard in banking. J Financ Intermed 15(3):332–361
Repullo R (2003) Liquidity, risk-taking and the lender of last resort. CEMFI Working Paper, 0504
Roodman D (2009) A note on the theme of too many instruments. Oxford Bull Econ Stat 71(1):135–158
Santomero AM (1984) Modeling the banking firm: a survey. J Money Credit Bank 16(4):576–602
Schertler A (2010) Insights on banks’ liquidity management: evidence from regulatory liquidity data. Beitraege zur Jahrestagung des Vereins fr Socialpolitik 2010
Sharpe W (1978) Bank capital adequacy, deposit insurance and security values. J Financ Quant Anal 13: 701–718
This paper was conceived while Van Lelyveld and Zymek were at the Bank of England. We would like to thank Jack Bekooij for excellent statistical support, seminar participants at De Nederlandsche Bank, the Bank of England, the European Banking Authority, University of Osnabrueck as well as Jakob de Haan, Leo de Haan, Valeriya Dinger, Michel Heijdra, Paul Hilbers, Harry Huizinga, Jan Willem van den End, Lars Overby and Stefan Schmitz for comments and suggestions. The paper represents the authors’ opinions and not necessarily those of the affiliated institutions.
Electronic supplementary material
Below is the link to the electronic supplementary material.
About this article
Cite this article
Bonner, C., Lelyveld, I.v. & Zymek, R. Banks’ Liquidity Buffers and the Role of Liquidity Regulation. J Financ Serv Res 48, 215–234 (2015). https://doi.org/10.1007/s10693-014-0207-5
- Financial regulation