Template-Type: ReDIF-Paper 1.0
Title: Liquidity Regulation and Bank Risk Taking on the Horizon
Author-Name: Joshua Bosshardt
Author-Email: jjbosshardt@gmail.com
Author-Name: Ali Kakhbod
Author-Email: akakhbod@berkeley.edu
Author-Name: Farzad Saidi
Author-Email: saidi@uni-bonn.de
Classification-JEL: G20, G21, G22, G28
Keywords: Liquidity Regulation, Bank Risk Taking, Insurance Sector, LCR, NSFR

Abstract: We examine how banks’ liquidity requirements affect their incentives to take risk with
their remaining illiquid assets. Our model predicts that banks with more stable liabilities
are more likely to engage in risk taking in response to tighter liquidity requirements. This
prediction is borne out in transaction-level data on corporate and mortgage loans for U.S.
banks subject to the liquidity coverage ratio (LCR). For identification, we exploit variation
in long-term bank bonds held by insurance companies that are not affected by the LCR.
Our results point to a trade-off between bank risk taking and ensuring funding resilience
over different horizons.

Note: 
Length: 91
Creation-Date: 2023-01
Revision-Date: 
File-URL: https://www.crctr224.de/research/discussion-papers/archive/dp389
File-Format: application/pdf
Handle: RePEc:bon:boncrc:CRCTR224_2023_389