Navigating the Low Interest Rate Landscape: Assessing Liquidity Positions of EU Banks under the LCR Constraint

Abstract

This paper explores the impact of the Liquidity Coverage Ratio (LCR) as a binding constraint on banks. Using a panel dataset encompassing 707 banks located in EU countries over the years 2012 to 2018, we analyze the phased introduction of the LCR, starting at 60% in 2015 and reaching full implementation at 100% in 2018. Our research reveals a positive effect of the LCR on liquidity buffers and a negative impact on the loan-to-deposit ratio, indicating strengthened liquidity positions. Contrary to expectations, estimations across five bank types demonstrate a significant LCR impact on all categories. Additionally, the study investigates the adverse effects of low or negative interest rates, particularly affecting cooperative and savings banks. Based on these findings, we recommend that policymakers maintain a vigilant approach to liquidity regulations, ensuring their adaptability to diverse bank types and considering measures to alleviate the negative impact of prolonged low or negative interest rate environments on specific bank categories.