Abstract:
In December 2010, the Basel Committee on Baking Supervision
introduced the liquidity coverage ratio (LCR) standard
for banking institutions in response to disturbances that rocked
banks during the 2007/08 global financial crisis. The rule is aimed
at enhancing banks’ resilience to short term liquidity shocks as it
requires banks to hold ample stock of high grade securities. This
study attempts to evaluate the impact of the LCR specification on the
funding structures of banks in emerging markets by answering the
question “Did Basel III LCR requirement induced banks in emerging
market economies to increase deposit funding more than they would
otherwise do?” The study found that the LCR charge has been effective
in persuading banks in emerging markets to garner more stable
retail deposits. This response may engender banking sector stability
if competition for retail deposits is properly regulated.
