LCRs effekt på de finansielle danske institutioners likviditetsbeholdning

Lizette Eistrup Jensen

Student thesis: Master thesis

Abstract

This thesis investigates the impact of the liquidity coverage ratio (LCR) on financial institutions liquidity portfolio on the Danish Market. LCR is a new Basel III liquidity requirement, which requires banks to hold sufficient high-quality liquid assets to survive a 30-day period of market stress. A part of monetary policy involves open market operations, where the central bank adds liquidity to the market and sets the target on interest rates. The thesis covers a basis model of the monetary policy implementation where LCR requirement will be introduced. The model shows that if banks have problems fulfilling LCR, the usual link between open market operations and the overnight interest rate changes and the short end of the yield curve becomes steeper. The basis model is extended to a new model, where the focus is to see the effects from LCR in countries with limited supply of high-quality liquid assets. In limited markets there can be significant side effects. LCR can lead to a large liquidity premium and push the short-term interest rate to the floor of the central banks rate corridor. The Basel Committee suggests that central banks in limited markets add a committed liquidity facility to mitigate these effects. Denmark has a limited market of government bonds and a covered bonds market, which is almost four times larger. Politicians and experts have worked to get a classification of Danish covered bonds on the same level as Danish government bonds in CRD-IV. The key finding extending the model to covered bonds is that banks are interested in holding covered bonds, when the rate on covered bonds is greater than the rate on government bonds. The main conclusion is that the financial Danish institutions liquidity portfolio is hardly affected by the introduction of the LCR requirement. This is due to the classification of covered bonds as level 1 asset in the CRD IV directive. If covered bonds where classified as level 2 the financial Danish institutions had to change a large portion of their liquid assets from covered bonds to other assets.

EducationsMSc in Mathematics , (Graduate Programme) Final Thesis
LanguageDanish
Publication date2014
Number of pages95