The impact of bank liquidity regulation Basel III on credit supply: Modeling with panel data

Abstract

The final version of Basel III published in 2010 for the implementation between 2015 and 2019 showed that regulators have learned the lessons of the financial crisis, which highlighted the liquidity risk of financial institutions. Thus, the Moroccan banking system is much stronger today than it was during the previous crisis. Indeed, Moroccan banks are largely covered and have, today, safety cushions in terms of equity and liquidity built up thanks to the tightening of prudential standards. However, the cumulative effects of the new liquidity standards could lead to a contraction in the supply of bank credit, which, given the importance of this source of financing for the economy, could prove harmful to businesses. This study examines the impact of the Liquidity Coverage Ratio (LCR) on the supply of credit to non-financial firms and households in Morocco using annual data from 2015 to 2021. The empirical analysis uses data from a panel of Moroccan credit institutions. The results suggest that the level of the liquidity ratio (LCR) has a positive impact on the growth rate of credit granted. The study reveals that Moroccan banks with a higher liquidity ratio granted more loans to Moroccan households and non-financial firms. The impact of the implementation of the short-term liquidity ratio is less problematic for Moroccan banks, especially the big banks, insofar as they are retail banks whose majority of resources are deposits. Therefore, the impact of the LCR ratio is perceived as moderate for retail banking activities. The quantitatively small impact of the constraints suggests that Basel III has been successful in setting liquidity requirements to minimize the impact on bank supply credit and the likelihood of an industry-wide liquidity crisis.

Keywords: Basel III, Credit supply, LCR, Panel model; Moroccan banking system

JEL Classification: C01; G21; L20

Paper type: Empirical research