Liquidity Regulation and Bank Lending

Résumé 0

Bank liquidity shortages during the global financial crisis of 2007-2009 led to the introductionof liquidity regulations, the impact of which has attracted the attention of academics andpolicymakers. In this paper, we investigate the impact of liquidity regulation on bank lending.As a setting, we use the Netherlands, where a Liquidity Balance Rule (LBR) was introducedin 2003. The LBR was imposed on Dutch banks only and did not apply to other banksoperating elsewhere within the Eurozone. Using this differential regulatory treatment toovercome identification concerns and a difference-in-differences approach, we find thatstricter liquidity requirements did not reduce the lending of Dutch banks relative to otherbanks not subject to the provisions of the LBR. However, the LBR did lead Dutch banks tomodify the structure of loan portfolios by increasing corporate lending and reducing mortgagelending relative to banks not subject to the LBR. Dutch banks also experienced a significantincrease in deposits and issued more equity relative to counterparts not subject to the liquidityrequirements. Overall, our results have obvious relevance for policymakers tasked withmonitoring the impact of liquidity regulations on banks and the real economy.