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The pro-cyclical effects of accounting rules on Basel III liquidity regulation

The pro-cyclical effects of accounting rules on Basel III liquidity regulation

Stojanovic, Aleksandar and Song, Guoxiang (2017) The pro-cyclical effects of accounting rules on Basel III liquidity regulation. [Working Paper] (doi:

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Basel III introduces the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR) to enhance bank liquidity regulation. This paper investigates whether accounting rules have pro-cyclical effects on these liquidity requirements. By rearranging and simplifying the formulae for the LCR and the NSFR, the paper analyses the linkages among accounting rules, capital rules and liquidity ratios. Due to these linkages, recurring fair value measurements are found to have pro-cyclical effects on both the LCR and the NSFR whereas the provision for loan losses is found to have positive effects on the NSFR although it has little impact on the LCR. The expected loss (EL) model for loan loss provisioning will introduce a new pro-cyclical impact on the NSFR even though it will lessen the pro-cyclical impact of the incurred-loss impairment model on the leverage ratio. Therefore, the contribution of accounting rules to the pro-cyclicality in the regulatory system will be enhanced as the paper also finds that the Basel III liquidity rules and the Basel III capital rules will reinforce each other’s pro-cyclicality.

Item Type: Working Paper
Uncontrolled Keywords: Liquidity coverage ratio; Net stable funding ratio; Fair value accounting; Provision for loan losses; Pro-cyclicality; Basel III
Subjects: H Social Sciences > HF Commerce > HF5601 Accounting
Faculty / Department / Research Group: Faculty of Business
Faculty of Business > Department of Accounting & Finance
Faculty of Business > Institute of Political Economy, Governance, Finance and Accountability (IPEGFA) > Centre for Governance, Risk & Accountability (CGRA)
Last Modified: 12 Aug 2020 12:31
Selected for GREAT 2016: None
Selected for GREAT 2017: GREAT a
Selected for GREAT 2018: None
Selected for GREAT 2019: None
Selected for REF2021: None

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