Liquidity regulation and bank risk

This article examines the impact of bank liquidity regulation on bank risk. By leveraging a quasi-natural experiment of strengthened liquidity regulation for Chinese commercial banks with total assets of no less than RMB 200 billion, we employ a staggered difference-in-differences (DID) model to investigate the impact of liquidity regulation on bank risk and its transmission channels. We find that liquidity regulation significantly reduces bank risk, primarily because it decreases demand deposits, increases time deposits and loan issuance, and raises interest income and net interest margin (NIM). The effect of liquidity regulation is more pronounced in banks with higher capital adequacy ratio, larger asset sizes, and a higher ratio of short-term funding, as well as in banks located in regions with lower financial regulatory intensity.