Global standard and bank liquidity creation: A case study of Basel III liquidity regulation

Abstract

Can the introduction of a new global standard directly impact the operations of domestically regulated banks before it is enacted through national legislation? This paper explores this question by examining the effects of the Basel III liquidity standard on liquidity creation by U.S. banks. Following the Basel Committee’s endorsement of this standard in December 2010, banks with low liquidity immediately reduced their asset-side liquidity creation by holding more liquid assets. At the same time, these banks increased their liability-side liquidity creation by attracting more deposits through higher deposit interest rates—well before the standard was implemented as domestic regulation in the U.S. These findings provide empirical evidence that enhanced global regulatory cooperation can cause newly established international standards to act as direct and immediate regulatory shocks to domestically regulated financial institutions, even in the absence of national legislation.