Liquidity Regulation and Bank Risk

In this paper, we investigate the impact of liquidity requirements on bank risk. We take advantage implementation Liquidity Balance Rule (LBR) in Netherlands 2003 and analyze its default The LBR was imposed Dutch banks only did not apply to other operating elsewhere within Eurozone. Using differential regulatory treatment overcome identification concerns, find that following introduction LBR, risk declined relatively counterparts affected by rule. Concomitantly, despite lower cost funding driven profitability decreased comparison with Europe, as a result decrease income accruing from interest-bearing activities. Our findings also indicate unaffected banks, might have actively tried offset their loss interest increasing rates loans. However, better financing conditions allowed increase shares deposits capital liability side balance sheets.