Banks subject to liquidity coverage ratio create less liquidity, Fed researchers find

18 October 2018 7:15am
Large and mid-size banks subject to the US liquidity coverage ratio have been creating less liquidity in the last few years, raising questions of whether the post-crisis standard is “socially harmful,” US Federal Reserve researchers said.

The drop in liquidity creation occurred in commercial and residential real-estate loans made by banks with more than $50 billion in assets, and in their transactions in short-term, volatile overnight debt and trading liabilities.

“Our results highlight the trade-off between lower liquidity creation and lower run risk from reduced liquidity mismatch of the largest banks,” Fed researchers Daniel Roberts, Asani Sarkar and Or Shachar said in a blog this week about their study. “Whether this reduction in liquidity creation is socially harmful is unclear.”