Basel III and Bank Liquidity Creation

Banks transform liquid deposits into illiquid loans, and in this transformation liquidity is created. Banks are not only intermediaries between depositors and borrowers, but are also central to monetary creation. As a result of the financial crisis of 2008, the role of banks as liquidity creators has gained renewed interest in the literature. The new Basel III regulatory framework affects the classical banking model in the sense that it requires additional capital, but it also obliges banks to switch to a long-term funding model. To adapt to the new regulation, several strategies have been adopted by banks, one of which is to reduce the volume of loans, especially when the new regulation significantly increases the level of capital required. In this article, we present the effects of the new Basel III regulatory framework on liquidity creation, and we show that there is no consensus among researchers on the question of what the impact of the new regulation will be on liquidity creation by the banking sector.
Keywords: Liquidity Creation; Banks; Basel III.
JEL Codes: G21; G28.