How banks adjust excess reserves and other balance sheet items under Basel III liquidity regulation and negative interest rates – A review of largest bank groups in EU

dc.contributorAalto Universityen
dc.contributorAalto-yliopistofi
dc.contributor.advisorJarva, Henry
dc.contributor.authorRikka, Olli
dc.contributor.departmentLaskentatoimen laitosfi
dc.contributor.schoolKauppakorkeakoulufi
dc.contributor.schoolSchool of Businessen
dc.date.accessioned2020-09-27T16:02:15Z
dc.date.available2020-09-27T16:02:15Z
dc.date.issued2020
dc.description.abstractBefore the financial crisis of 2007-2008, European banks held zero or insignificant amounts of excess liquidity (EL) on their balance sheets. Since 2008, the level of EL has increased to over 1,800 billion euros. The main reason are the massive liquidity operations of the ECB in response to the financial-, debt-, migrant-, and COVID-19 crises. Simultaneously, the Basel Committee on Banking Supervision submitted a significant reform package, the Basel III, to strengthen the regulation on bank solvency and liquidity. Since both ECB’s operations and regulatory requirements were implemented at a very fast pace in a short time period, the side effects are not well understood. In order to provide information on how the development has influenced banks’ balance sheets structures and liquidity management practices, this thesis aims to understand how banks with different business models have adjusted their balance sheets. Previously, it has been found that banks’ liquidity choices are largely affected by the negative interest rate policy of the ECB, and the liquidity coverage ratio (LCR). Because bank’s customer deposits are floored at zero interest rate, banks with large deposits bases are likely to be incentivized to decrease level of EL, because the remuneration rate on EL is negative. The data sample for this thesis was collected from Orbis database and Pillar III risk disclosure tables. For data analysis, this thesis used regression tables and correlation analysis tools available in SAS. The data sample consisted of largest 36 banks operating in EU with sufficient data available in Orbis. Also, banks are required to disclose their Pillar III liquidity tables since 2017. The data sample used in this thesis was able to capture approximately 54% of the EL circulating in EU. The results indicated that most EL, up to three quarters of the sample was held in France, Germany, Spain, Finland, and the Netherlands. The results suggested that different business models can indicate level of EL. Firstly, banks with large deposits held relatively less excess liquidity, suggesting that while banks are reluctant to charge their customers on deposits, banks optimize their balance sheets by decreasing level of EL. Secondly, banks with high loan-to-deposit ratio (LTD) held relatively less excess liquidity to compensate more expensive market funding. In addition, while banks can access the central bank facilities of the ECB with generous terms, market risk aversion did not explain high EL. Thirdly, based on analysis on components of LCR, banks have increased loans, which were mostly funded by EL or by increase in unsecured wholesale funding. While banks had decreased EL between 2017 and 2019, they also had significantly increased level of other high-quality liquid assets (HQLA) on balance sheets.en
dc.format.extent68 + 5
dc.identifier.urihttps://aaltodoc.aalto.fi/handle/123456789/46659
dc.identifier.urnURN:NBN:fi:aalto-202009275584
dc.language.isoenen
dc.locationP1 Ifi
dc.programmeAccountingen
dc.subject.keywordbanken
dc.subject.keywordexcessen
dc.subject.keywordliquidityen
dc.subject.keywordBasel IIIen
dc.subject.keywordLCRen
dc.subject.keywordHQLAen
dc.subject.keywordrisken
dc.subject.keywordrisk managementen
dc.titleHow banks adjust excess reserves and other balance sheet items under Basel III liquidity regulation and negative interest rates – A review of largest bank groups in EUen
dc.typeG2 Pro gradu, diplomityöfi
dc.type.ontasotMaster's thesisen
dc.type.ontasotMaisterin opinnäytefi
local.aalto.electroniconlyyes
local.aalto.openaccessno

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