No. 32 - Banks' liquidity transformation rate: determinants and impact on lending

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by Raffaele Lenzi, Stefano Nobili, Filippo Perazzoli and Rosario RomeoMarch 2023

This paper examines the interaction between the liquidity coverage ratio (LCR), the composition of the collateral pool, banks' characteristics, and lending activity. Our contribution is twofold. Firstly, we analyse how banks' characteristics correlate with their liquidity transformation rate. The main finding is that variables relating to banks' liquidity and efficiency have an impact on their liquidity transformation rate, though we did not find any link with financial soundness indicators. This supports the view that central banks can provide liquidity and relax the collateral framework without taking on excessive risks on their balance sheets. Secondly, we investigate how banks' liquidity transformation rate correlates to credit supply. Our findings show that the banks that pledged more illiquid assets against central bank reserves are those that increased their lending to the economy the most, suggesting that the broad range of eligible collateral in the euro area may have supported the provision of credit to the real economy in recent years and, in particular, during the pandemic.

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