Banks’ Liquidity Buffers and the Role of Liquidity Regulation


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.

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  1. 1.

    See for example Brunnermeier (2009) and BCBS (2008).

  2. 2.

    See BCBS (2010) and BCBS (2013).

  3. 3.

    See ESRB (2013).

  4. 4.

    (2009) and Gennaioli et al. (2013) are other recent study dealing with banks’ liquidity holdings. The former analyzes the impact of transnational banks on system-wide liquidity risks while the latter analyzes the holdings of public bonds and the role of these bonds during sovereign debt crises.

  5. 5.

    Note that we face the usual trade-off between broad country coverage and data granularity. While we decided in favor of broad country coverage, Bonner and Eijffinger (2013) and Bonner (2014) are examples of using more granular data.

  6. 6.

    See BCBS (2014) for disclosure, Demirgüç-Kunt and Detragiache (2002) for deposit insurance coverage and Aspachs et al. (2005) for concentration.

  7. 7.

    See for instance Bonner and Eijffinger (2013) or Bech and Keister (2012) who argue that jurisdictions which implement monetary policy using the overnight interest rate face different challenges when implementing the LCR than jurisdictions for which this is not the case.

  8. 8.

    See Drehmann and Nikolaou (2009).

  9. 9.

    See Brunnermeier (2009).

  10. 10.

    Please note that even non-binding liquidity requirement is likely to change banks’ relative incentives to hold certain assets.

  11. 11.

    See Table A.4 in the Supplementary Material for an overview based on Bundesbank (2006), BDF (1988), CBI (2009), Lee (2013), CSSF (2007), DNB (2003), BOE (2013) for more information regarding the requirements in the individual countries. See Algorithmics (2007) for an overview.

  12. 12.

    See Gennaioli et al. (2014) who provide a similar argumentation for banks’ reserve requirements.

  13. 13.

    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.

  14. 14.

    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.

  15. 15.

    Also see Farag et al. (2013).

  16. 16.

    See for instance Jordan et al. (2000) or Nier and Baumann (2006).

  17. 17.

    See, for instance, Sharpe (1978), Flannery (1989), Chan et al. (1992) or Demirgüç-Kunt and Detragiache (2002).

  18. 18.

    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.

  19. 19.

    Please note that all findings reported below are robust to using the alternative Local GAAP accounting standard where possible.

  20. 20.

    The variable’s source is the World Bank’s World Development Indicators (WDI). See also Demirgüç-Kunt et al. (2005).

  21. 21.

    We use the survey from 2007. An earlier version is described in depth in Barth et al. (2008). All statements are double-checked with the literature cited in Section 2.4.

  22. 22.

    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.

  23. 23.

    These variables include GDP growth, inflation, short- and long-term interest rates, stock market capitalization, government debt and financial openness.

  24. 24.

    We also ran regressions using the Arellano and Bover (1995) and the Hausman and Taylor (1981) estimator. As the results are very similar to those obtained with the other estimators we do not report them for reasons of brevity.

  25. 25.

    Please note that this argument holds despite the fact that retail deposits are considered to be one of the most stable source of funding.

  26. 26.

    See, for instance, De Haas and Van Lelyveld (2010, 2014).

  27. 27.

    See De Haas and Van Lelyveld (2010, 2014) and the literature cited therein for an analysis of how local and global shocks affect internationally active banks.

  28. 28.

    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.


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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.

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Correspondence to Clemens Bonner.

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Bonner, C., Lelyveld, I.v. & Zymek, R. Banks’ Liquidity Buffers and the Role of Liquidity Regulation. J Financ Serv Res 48, 215–234 (2015).

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  • Liquidity
  • Financial regulation
  • Disclosure
  • Banks

JEL Classifications

  • G20
  • G21
  • G28