Abstract:
We evaluate how the liquidity coverage rule affects US banks' liquidity buffers, opacity, and liquidity risk.
Banks subject to the rule increase their high quality liquid asset holdings by 36%, opacity by 58% and liquidity risk by $245 million per quarter.
The increase in opacity and liquidity risk is more pronounced among banks that are subject to the rule's more stringent liquidity buffers, and banks closer to insolvency.
Rising opacity reflects an increase in banks' holdings of complex assets whose value is difficult to communicate to investors, rather than changes in organizational complexity or less earnings information disclosure.
The evidence highlights the unintended consequences of liquidity regulation and is consistent with theoretical models' predictions of a trade-off between liquidity buffers and bank opacity that influences liquidity risk.
Short bio:
Danny McGowan is a Professor of Finance and Head of the Department of Finance at Birmingham Business School.
He holds a PhD in Economics from the University of Nottingham.
His research interest lie in applied microeconomics with a focus on banking and financial intermediation.
His recent work studies connections between the law and and bank conduct.
Dr McGowan's research appears in leading academic journals including the Review of Financial Studies, Journal of Financial and Quantitative Analysis, Journal of Financial Intermediation, and Journal of Corporate Finance.
He has received research funding from the ESRC, British Academy, and the Leverhulme Trust.
His research has been cited in House of Commons inquiries and by several media outlets.