The dark side of liquidity regulation: bank opacity and funding liquidity risk

Arisyi Raz; Danny McGowan; Tianshu Zhao

doi:10.1016/j.jfi.2022.100990

The dark side of liquidity regulation: bank opacity and funding liquidity risk

Arisyi Raz, Danny McGowan^*, Tianshu Zhao

^*Corresponding author for this work

Finance

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Abstract

We evaluate how the liquidity coverage rule affects US banks’ opacity and funding liquidity risk. Banks subject to the rule become significantly more opaque and funding liquidity risk increases by $245 million per quarter. Higher funding liquidity risk is more pronounced among banks that are subject to the rule’s more stringent liquidity buffers, and systemically riskier banks. Rising opacity reflects an increase in banks’ holdings of complex assets whose value is difficult to communicate to investors. The evidence highlights the unintended consequences of liquidity regulation and is consistent with theoretical models’ predictions of a trade-off between liquidity buffers and bank opacity that exacerbates funding liquidity risk.

Original language	English
Article number	100990
Number of pages	13
Journal	Journal of Financial Intermediation
Volume	52
Early online date	11 Aug 2022
DOIs	https://doi.org/10.1016/j.jfi.2022.100990
Publication status	Published - Oct 2022

Bibliographical note

Funding Information:
☆ We are grateful for helpful suggestions from Murillo Campello, the editor, three anonymous referees, Nicolo Bandera, Tobias Berg, Victoria Böhnke, Tatiana Damjanovic, Piotr Danisewicz, Hans Degryse, Declan French, Malika Hamadi, Florian Hoffman, Vasso Ioannidou, Victoria Ivashina, Santosh Koirala, Mike Mariathasan, Stephen Millard, Enrico Onali, Amiyatosh Purnanandam, Tarik Roukny, Alessandro Scopelliti, John Turner, Iman van Lelyveld, and seminar and conference participants at the Bank of England, University of Birmingham, University of Durham, KU Leuven, Queen's University Belfast, University of Zürich, the European Economic Association Conference, the European Financial Management Association Conference, the Essex Finance Centre (EFiC) Conference, the International Finance and Banking Society, and the Money, Macro and Finance Conference.

Publisher Copyright:
© 2022 The Author(s)

Keywords

Liquidity coverage ratio
Funding liquidity risk
Bank opacity

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Cite this

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title = "The dark side of liquidity regulation: bank opacity and funding liquidity risk",

abstract = "We evaluate how the liquidity coverage rule affects US banks{\textquoteright} opacity and funding liquidity risk. Banks subject to the rule become significantly more opaque and funding liquidity risk increases by $245 million per quarter. Higher funding liquidity risk is more pronounced among banks that are subject to the rule{\textquoteright}s more stringent liquidity buffers, and systemically riskier banks. Rising opacity reflects an increase in banks{\textquoteright} holdings of complex assets whose value is difficult to communicate to investors. The evidence highlights the unintended consequences of liquidity regulation and is consistent with theoretical models{\textquoteright} predictions of a trade-off between liquidity buffers and bank opacity that exacerbates funding liquidity risk.",

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note = "Funding Information: ☆ We are grateful for helpful suggestions from Murillo Campello, the editor, three anonymous referees, Nicolo Bandera, Tobias Berg, Victoria B{\"o}hnke, Tatiana Damjanovic, Piotr Danisewicz, Hans Degryse, Declan French, Malika Hamadi, Florian Hoffman, Vasso Ioannidou, Victoria Ivashina, Santosh Koirala, Mike Mariathasan, Stephen Millard, Enrico Onali, Amiyatosh Purnanandam, Tarik Roukny, Alessandro Scopelliti, John Turner, Iman van Lelyveld, and seminar and conference participants at the Bank of England, University of Birmingham, University of Durham, KU Leuven, Queen's University Belfast, University of Z{\"u}rich, the European Economic Association Conference, the European Financial Management Association Conference, the Essex Finance Centre (EFiC) Conference, the International Finance and Banking Society, and the Money, Macro and Finance Conference. Publisher Copyright: {\textcopyright} 2022 The Author(s)",

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The dark side of liquidity regulation: bank opacity and funding liquidity risk

Abstract

Bibliographical note

Keywords

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