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Spillover Effects of Banks’ Liquidity Risk Control

This study investigates spillover effects of banks’ liquidity risk control on the real economy by using the introduction of the Basel III liquidity regulation as shocks to banks. Since the Basel Committee's endorsement of this regulation in December 2010, banks exposed to high liquidity risk have significantly reduced the proportion of loans in their portfolio. In regions with many such banks, these reductions resulted in decreased small business lending, GDP, and employment growth. After the introduction of this regulation, banks with less-liquid balance sheets raised deposit rates aggressively, generating liquidity problems in nearby banks through deposit competition and curbing their credit supply.