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Preferential Regulatory Treatment and Banks' Demand for Government Bonds
Author(s) -
BONNER CLEMENS
Publication year - 2016
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12331
Subject(s) - market liquidity , bond , government (linguistics) , business , capital (architecture) , monetary economics , database transaction , financial system , transaction cost , economics , finance , linguistics , philosophy , archaeology , computer science , history , programming language
The purpose of this paper is to analyze the impact of preferential regulatory treatment on banks' demand for government bonds. Using unique transaction‐level data, our analysis suggests that preferential treatment in microprudential liquidity and capital regulation significantly increases banks' demand for government bonds. Liquidity and capital regulation also seem to incentivize banks to substitute other bonds with government bonds. We also find evidence that this “regulatory effect” leads banks to reduce lending to the real economy.