# Net Stable Funding Ratio and Liquidity Hoarding

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## Abstract

As a component of the liquidity requirements of Basel III, the Net Stable Funding Ratio (*NSFR*) seeks to limit the maturity transformation of banks. This paper examines whether the *NSFR* affects the inefficient precautionary liquidity hoarding of banks and the stability of interbank markets. Based on Acharya and Skeie (2011), the model introduces regulation into a two-period framework with asymmetric information and stochastic credit risk. As a result, due to regulatory costs, the *NSFR* increases the bid-ask spread on the interbank market. The effects depend strongly on the quality and the forbearance of the regulator. High-quality supervision counters the precautionary liquidity hoarding of banks resulting from asymmetric information, thereby decreasing market failure.

## Keywords

Basel III Regulation Liquidity hoarding## JEL Classification

G21 G28 G33## Notes

### Acknowledgements

I am grateful to Udo Broll, Hans-Peter Burghof, Hartmut Egger, Thomas Gehrig, Claudia Kuehne, Gabriel Lee, Thilo Pausch, Regina T. Riphahn, Eva Schliephake, Mohamed Shaban and Peter Welzel for useful comments. I also acknowledge input from the seminar particpants at the ICBFP (Famagusta), the BGPE research workshop (Bayreuth), the EARIE (Maastricht), the GEABA (Hohenheim), the workshop “Banks and Financial Markets” of the Deutsche Bundesbank (Eltville), the IFABS (Porto) and the WIEM (Warsaw) and two anonymous reviewers.

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