How Does the NSFR Affect Bank Lending?

Abstract

This study investigates the effects following the introduction of the novel NSFR requirement on bank lending, addressing the prevailing industry concerns about its potential adverse implications for banks’ credit provision. Specifically, a stylized theoretical model is developed which provides a foundation for analyzing the impact of the NSFR on lending and illustrates the underlying mechanisms. Furthermore an empirical analysis between 2013-2020 is conducted to explore the tangible impacts of the NSFR adoption. A distinct identification strategy is employed, focusing on banks in early NSFR-adopting countries of Hong Kong, South Korea, Singapore and Indonesia, that all introduced the requirement only few months before its enforcement in 2018, limiting the phase-in effect. Japanese banks are utilized as the control group while the concurrent introduction of other Basel III requirements across sample countries allowed to control for regulatory confounders. Using a dynamic panel data model with a system GMM estimator, the study provides evidence that the introduction of the NSFR has an insignificant effect on loan growth, a significant negative effect on banks’ NIMs and a significant positive effect on both long-term and short-term loan shares. Model diagnostic tests validate the empirical results, while placebo tests and analyses of mechanical effects further confirm the robustness of the paper’s findings. Finally, the results offer valuable insights for policymakers in understanding the new NSFR liquidity requirement.