Liquidity Regulation and Bank Lending.

Summary Bank liquidity shortages during the global financial crisis of 2007-2009 led to the introduction of liquidity regulations, the impact of which has attracted the attention of academics and policymakers. In this paper, we investigate the impact of liquidity regulation on bank lending. As a setting, we use the Netherlands, where a Liquidity Balance Rule (LBR) was introduced in 2003. The LBR was imposed on Dutch banks only and did not apply to other banks operating elsewhere within the Eurozone. Using this differential regulatory treatment to overcome identification concerns, we investigate whether there is a causal link from liquidity regulation to the lending activities of banks. Using a difference-indifferences approach, we find that stricter liquidity requirements following the implementation of the LBR did not reduce lending. However, the LBR did lead Dutch banks to modify the structure of loan portfolios by increasing corporate lending and reducing mortgage lending. During this period Dutch banks experienced a significant increase in deposits and issued more equity. Overall, the findings of this study have relevance for policymakers tasked with monitoring the impact of post-crisis liquidity regulations on bank behavior.