Market Reaction to Bank Liquidity Regulation

71 Pages Posted: 7 Nov 2016

See all articles by Brunella Bruno

Brunella Bruno

Bocconi University - Department of Finance

Enrico Onali

University of Exeter Business School

Klaus Schaeck

University of Bristol

Date Written: November 7, 2016

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 while 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.

Keywords: liquidity regulation, market reaction, event study, Basel III

JEL Classification: G21, G28

Suggested Citation

Bruno, Brunella and Onali, Enrico and Schaeck, Klaus, Market Reaction to Bank Liquidity Regulation (November 7, 2016). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming, Available at SSRN: https://ssrn.com/abstract=2865612

Brunella Bruno

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

Enrico Onali

University of Exeter Business School ( email )

Exeter
United Kingdom

Klaus Schaeck (Contact Author)

University of Bristol ( email )

University of Bristol,
Senate House, Tyndall Avenue
Bristol, BS8 ITH
United Kingdom

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