The role of net stable funding ratio on the bank lending channel: evidence from European Union

Abstract

This paper is motivated by the ongoing debate about the Basel III impact on the efficient functioning of the banking sector. We empirically examine the effect that the implementation of the net stable funding ratio has on real economy. Using data from the EU banking sector, we conduct a retrospective analysis by simulating and investigating historically the NSFR index and its role in the implementation of a common monetary policy. We intervene on the traditional bank lending channel of Bernanke and Blinder (Am Econ Rev 82:901–921, 1992) by incorporating the interaction term between liquidity and interest rates. The analysis is conducted both at an aggregated loan supply level and by loan category while it incorporates, additionally to the interaction term, conventional asset pricing approaches with the adoption of self-financing trading strategies detecting nonlinearities in the relationship between liquidity provisions and bank lending channel. According to our findings, there is evidence of a heterogeneous response of financial intermediaries’ loan supply (due to changes of interest rates) across different NSFR levels. Banks with higher NSFR respond positively to an interest rate increase, by restructuring their loans’ portfolios to achieve higher risk-adjusted returns, conditional on the presence of an efficient asset allocation. On the contrary, low NSFR banks reduce loan supply as a response to higher interest rates. © 2021, The Author(s), under exclusive licence to Springer Nature Limited.