Market reaction to bank liquidity regulation

Bruno, Brunella; Onali, Enrico; Schaeck, Klaus

Abstract

We measure market reactions to announcements concerning liquidity regulation, a key innovation in the Basel framework. Our initial results show that liquidity regulation attracts negative abnormal returns. However, the price responses are less pronounced when coinciding announcements concerning capital regulation are backed out, suggesting that markets do not consider liquidity regulation to be binding. Bank- and country-specific characteristics also matter. Liquid balance sheets and high charter values increase abnormal returns whereas smaller long-term funding mismatches reduce abnormal returns. Banks located in countries with large government debt and tight interbank conditions or with prior domestic liquidity regulation display lower abnormal returns.

Citation

Bruno, B., Onali, E., & Schaeck, K. (2018). Market reaction to bank liquidity regulation. Journal of Financial and Quantitative Analysis, 53(2), 899-935. https://doi.org/10.1017/S0022109017001089

• Journal Article Type: Article
• Acceptance Date: Nov 6, 2016
• Online Publication Date: Mar 4, 2018
• Publication Date: Apr 30, 2018
• Deposit Date: Jun 19, 2018
• Publicly Available Date: Jun 19, 2018
• Journal: Journal of Financial and Quantitative Analysis
• Print ISSN: 0022-1090
• Electronic ISSN: 1756-6916
• Publisher: Cambridge University Press
• Peer Reviewed: Peer Reviewed
• Volume: 53
• Issue: 2
• Pages: 899-935
• DOI: https://doi.org/10.1017/S0022109017001089
• Public URL: https://nottingham-repository.worktribe.com/output/929365
• Publisher URL: https://www.cambridge.org/core/journals/journal-of-financial-and-quantitative-analysis/article/market-reaction-to-bank-liquidity-regulation/B1E0832663AC0854937B0470BD658A1F
• Additional Information: This article has been published in a revised form in Journal of Financial and Quantitative Analysis http://doi.org/10.1017/S0022109017001089. This version is free to view and download for private research and study only. Not for re-distribution, re-sale or use in derivative works. © Michael G. Foster School of Business, University of Washington 2018.
• Contract Date: Jun 19, 2018