Chapter 5

Basel III Liquidity Regulation and the Economy

In this chapter, for Class I and II banks, we identify liquidity risk sources as well as their management. Also, we discuss the connections between such risk and credit in the period before, during, and after the financial crisis.1

We note that Basel III liquidity regulation will increase intermediation costs that will, in turn, affect the global macroeconomy. In particular, we show that the implementation of Basel III will affect macroeconomic variables such as GDP, investment, inflation, consumption, personal disposable income (PDI), personal savings, and employment. In order to compensate for the higher funding cost, banks will increase lending spreads. To counteract this, return on ...

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