BIS paper evaluates LCR's decade-long impact on bank liquidity
A new paper from the Bank for International Settlements (BIS) assesses the Liquidity Coverage Ratio (LCR) a decade after its implementation. It finds the LCR boosts bank liquidity but notes potential drawbacks like reduced lending and increased risk-taking.
LCR's Core Purpose and Gains
The LCR, a central Basel III pillar, mandates banks to hold high-quality liquid assets (HQLA) for short-term stress.
Research confirms it raises HQLA and reduces reliance on fragile short-term funding, enhancing welfare and stability.
Unintended Consequences
Despite its benefits, the LCR can induce greater risk-taking and crowd out lending.
The paper concludes with open questions on the LCR's effectiveness, optimal design, and its interaction with central bank policies.