A model of bank behaviour for the assessment of the potential balance sheet impact of the NSFR liquidity requirement

This paper provides a framework to examine the potential balance sheet adjustments of individual financial institutions for complying with the NSFR liquidity requirement. The suggested approach, which is also flexible enough to be applied in assessing the potential balance sheet impact of other regulatory proposals affecting the balance sheet of financial institutions, is an optimum model of bank behaviour, in which a bank statically rearranges its observed balance sheet by maximizing its profit with respect to constraints representing the balance sheet equality and various regulatory measures. According to our results, banks react to the introduction of the NSFR by strongly increasing their high-quality liquid assets, as well as fundamentally altering their short-term interbank funding to long-term. In addition, assuming no market frictions in the market for long-term funding from financial institutions, lending to the real economy decreases rather moderately as a consequence of the measure.