The cost of complying with Basel III liquidity regulations for South African banks
Howard Diesel, Mukelani Nkuna, Tim Olds and Daan Steenkamp
Last Modified Date:
2022-08-12, 08:50 AM
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Basel III regulatory reforms affect incentives for banks to choose between holding liquid assets or extending loans, and therefore potentially have monetary policy implications. Estimates of the costs of prudential regulations are important for accurate assessments of the transmission of these policies to the real economy via bank funding behaviour and credit extension, as well as for a cost-benefit analysis of such regulations. We construct an aggregate measure of high-quality liquid asset (HQLA) holdings by South African banks and discuss the shift in bank balance sheets to meet the liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) regulations. We also create measures of the implied cost of holding HQLA and maintaining LCR buffers for the South African banking sector using market and supervisory data. We then benchmark our estimates against the estimates of large banks themselves based on a once-off survey. We estimate that banks are holding HQLA at a positive carry relative to their cost of funds. This implies that the LCR requirements have created an opportunity cost in terms of forgone income from higher yielding loans or other investments, as opposed to a direct cost to banks. The NSFR regulations, on the other hand, served to increase banks’ funding costs by increasing the duration of banks’ funding liabilities and the relative cost of deposit funding. We suggest that these regulations have had monetary policy implications as they have raised bank funding costs and increased the sensitivity of bank balance sheets to sovereign creditworthiness and money market developments.