Bank for International Settlements paper finds liquidity coverage rules cut US banks wholesale funding costs by about 8 percent and lengthened borrowing maturities

The Bank for International Settlements has published a working paper finding that the Basel III Liquidity Coverage Ratio lowered the cost of US banks’ wholesale funding from money market funds and pushed funding toward longer maturities. Using instrument-level data on certificates of deposit, commercial paper, asset-backed commercial paper and repurchase agreements from February 2011 to December 2015, the paper concludes that banks with larger pre-regulation shortfalls against the Liquidity Coverage Ratio experienced steeper declines in funding costs after the rule was introduced. A one standard deviation larger pre-regulation Liquidity Coverage Ratio gap is associated with funding costs around 8 percent lower, or about 2.5 basis points at the sample mean of 31 basis points. The decline was stronger for longer-dated instruments, with the effect for maturities of 31 days or more about twice as large as for one-day funding. More exposed banks also borrowed larger amounts from money market funds and shifted their borrowing away from very short-term instruments toward longer maturities. The paper says these results are consistent with the Liquidity Coverage Ratio making banks safer and reducing the risk premium demanded by wholesale creditors. The published paper notes that the views expressed are those of the authors and do not necessarily reflect those of the BIS or its member central banks.