The findings suggest that the two liquidity requirements are indeed complementary and constrain different types of banks in different ways, similarly to the risk-based and leverage ratio requirements in the capital framework. Our article contributes to this debate by making use of granular supervisory data for euro area banks and the theoretical framework developed by Cecchetti and Kashyap (2018). Following this agreement, there has been some discussion – both among policymakers and academics – on whether the two requirements are indeed complementary, and whether both of them are needed to ensure sound liquidity profiles and management. While the LCR became applicable in 2014, the BCBS agreed on a rigorous review process for the NSFR and its implications for financial market functioning and the economy, delaying its applicability as a minimum standard until 2018. Both the LCR and the NSFR were included in the December 2010 Basel III agreement, in which the Basel Committee on Banking Supervision (BCBS) noted that the standards were meant to achieve two separate but complementary objectives. This article contributes to the discussion on the interaction of different regulatory metrics by empirically examining the interaction between the LCR and the NSFR for banks in the euro area. With multiple requirements applicable in parallel, the new framework has led to some discussion on the interaction of the various metrics. The 2010 Basel III reforms introduced the leverage ratio as a supplementary measure to the risk-based capital requirements, as well as the liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) requirements to capture liquidity risks. The post-crisis regulatory framework introduced multiple requirements on banks’ capital and liquidity positions, sparking a discussion among policymakers and academics on how the various requirements interact with one another. This dispels claims that the LCR and the NSFR are redundant and underlines the need for a faithful and consistent implementation of both measures (and the entire Basel III package more broadly) across all major jurisdictions, to maintain a level playing field at the global level and to ensure that the post-crisis regulatory framework delivers on its objectives. The findings suggest that the two liquidity requirements are complementary and constrain different types of banks in different ways, similarly to the risk-based and leverage ratio requirements in the capital framework. This article contributes to the discussion on the interaction of different regulatory metrics by empirically examining the interaction between the liquidity coverage ratio (LCR) and the net stable funding ratio (NSFR) for banks in the euro area. Prepared by Markus Behn, Renzo Corrias and Magdalena Rola-Janicka On the interaction between different bank liquidity requirements
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