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

Raz, Arisyi F.; McGowan, Danny; Zhao, Tianshu

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.

Citation

Raz, A. F., McGowan, D., & Zhao, T. (2022). The dark side of liquidity regulation: Bank opacity and funding liquidity risk. Journal of Financial Intermediation, 52, Article 100990. https://doi.org/10.1016/j.jfi.2022.100990

• Journal Article Type: Article
• Acceptance Date: Jul 26, 2022
• Online Publication Date: Aug 11, 2022
• Publication Date: Aug 11, 2022
• Deposit Date: Jun 10, 2024
• Journal: Journal of Financial Intermediation
• Print ISSN: 1042-9573
• Electronic ISSN: 1096-0473
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 52
• Article Number: 100990
• DOI: https://doi.org/10.1016/j.jfi.2022.100990
• Public URL: https://durham-repository.worktribe.com/output/2480778
• Additional Information: This article is maintained by: Elsevier; Article Title: The dark side of liquidity regulation: Bank opacity and funding liquidity risk; Journal Title: Journal of Financial Intermediation; CrossRef DOI link to publisher maintained version: https://doi.org/10.1016/j.jfi.2022.100990; Content Type: article; Copyright: © 2022 The Author(s). Published by Elsevier Inc.