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Determinants of banks' liquidity : a French perspective on market and regulatory ratio interactions

Author

Listed:
  • Sandrine Lecarpentier

    (EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique)

  • Olivier de Bandt

    (EconomiX - EconomiX - UPN - Université Paris Nanterre - CNRS - Centre National de la Recherche Scientifique)

  • Cyril Pouvelle
Abstract
The objective of the paper is to investigate how banks adjust the structure of their balance sheet as a response to a funding shock and to propose a methodology for projecting banks' liquidity ratios in a top-down stress test scenario. In line with a theoretical model assessing the effects of capital and liquidity constraints on banks' behaviour, we estimate the joint system of banks' solvency and liquidity ratios, using for proxy of the latter, the "liquidity coefficient" implemented in France before Basel III. We provide evidence of a positive effect of the solvency ratio on the liquidity coefficient: a high level of solvency enables the liquidity coefficient to improve due to a more stable funding structure. By contrast, we do not find firm evidence of an impact of the liquidity coefficient on the solvency ratio. We also show that financial variables capturing international markets' risk aversion and tensions in the interbank market have a significant impact during periods of stress only, confirming the evidence of strong interactions between market liquidity and bank funding liquidity during crisis periods.

Suggested Citation

  • Sandrine Lecarpentier & Olivier de Bandt & Cyril Pouvelle, 2019. "Determinants of banks' liquidity : a French perspective on market and regulatory ratio interactions," Working Papers hal-04141861, HAL.
    • Handle: RePEc:hal:wpaper:hal-04141861
    Note: View the original document on HAL open archive server: https://hal.science/hal-04141861
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Bank Capital Regulation; Bank Liquidity Regulation; Basel III; stress tests;
    All these keywords.

    JEL classification:

    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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