The Bank for International Settlements has published a working paper finding that bank liquidity requirements contributed to the expansion of private credit in the United States. Private credit grew significantly more after the introduction of the liquidity coverage ratio (LCR) in counties where affected banks had a larger initial deposit share or greater liquidity shortfalls. The estimated contribution of liquidity regulation was comparable in magnitude to that of increased capital requirements associated with the 2012 Comprehensive Capital Analysis and Review stress tests. Using data covering 2010–2019, the study estimates that a one standard deviation higher initial deposit share of banks subject to the LCR was associated with nearly 50% higher subsequent private credit volumes. The findings suggest that private credit partly replaced lending displaced as banks increased their holdings of liquid assets. Effects were stronger in industries more dependent on external finance and those whose assets were harder to redeploy. No significant corresponding change appeared in leveraged loan volumes, supporting the interpretation that banks’ balance sheet constraints, rather than broader changes in local loan demand, drove the shift. Moving loans from banks funded by deposits to traditional private credit funds could substantially reduce maturity transformation and liquidity risk because fund investors typically commit capital for periods closer to loan maturities. However, the paper does not establish a reduction in overall systemic risk. Leverage, the growth of vehicles offering more frequent redemptions and banks’ credit lines to private credit funds complicate that assessment.
Bank for International Settlements publishes research linking bank liquidity requirements to private credit growth in the United States
A working paper published by the Bank for International Settlements links U.S. bank liquidity requirements to faster private credit expansion, with an estimated effect comparable to that of capital requirements associated with the 2012 stress tests. A one standard deviation higher initial local deposit share of banks subject to the liquidity coverage ratio was associated with nearly 50% higher subsequent private credit volumes. The shift could reduce liquidity risk, but its overall systemic risk effects remain unresolved.