Modelling the liquidity ratio as macroprudential instrument

Jan Willem Van Den End, Mark Kruidhof

Research output: Contribution to JournalArticleAcademicpeer-review


The Basel 3 Liquidity Coverage Ratio (LCR) is a micro prudential instrument to strengthen the liquidity position of banks. However if in extreme scenarios the LCR becomes a binding constraint, the interaction of bank behaviour with the regulatory rule can have negative externalities. We simulate the systemic implications of the LCR by a liquidity stress-testing model, which takes into account the impact of bank reactions on second round feedback effects. We show that a flexible approach of the LCR, in particular one which recognises less liquid assets in the buffer, is a useful macroprudential instrument to mitigate its adverse side-effects during times of stress. At extreme stress levels the instrument becomes ineffective and the lender of last resort has to underpin the stability of the system.
Original languageEnglish
Pages (from-to)91-106
Number of pages16
JournalJournal of Banking Regulation
Issue number2
Publication statusPublished - Apr 2013
Externally publishedYes


  • banks
  • financial stability
  • liquidity
  • regulation


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