The Impact of Concurrent Capital and Liquidity Requirements

The objective of this paper is to examine the impact of concurrent capital and liquidity constraints. The financial crisis of 2008 prompted Basel III, which addresses both capital and liquidity requirements of banks. In an effort to understand the policy efficacy of Basel III, it is important for us to understand how capital regulation and liquidity requirements interact and impact bank lending. We find that when both capital and liquidity constraints are binding; a rise in money market funds restricts loan supply. When the constraints are non-binding, we find that the desired amount of bank equity falls as cash holdings decline.