Research

Wrong Buffer? Liquidity Requirements and Bank Fragility in the Pre-Capital Regulation Era: Evidence from an Emerging Economy [JOB MARKET PAPER] [PDF]  

Presentations: KBS PhD Symposium 2023 | Asian Development Bank Institute 2025  |  IMRC 2025 (Scheduled) | Vietnam Symposium in Banking and Finance 2025 (withdrawn)

Abstract: Do liquidity requirements reduce or amplify bank fragility? Historically, such rules played a central role in financial stability, particularly in emerging economies, before the introduction of capital regulation. To address this question, I estimate the impact of these requirements on Indian commercial banks between 1972 and 2002, a period when capital regulation was absent and the Reserve Bank of India frequently adjusted minimum liquidity ratios to ensure banks held a sufficient stock of liquid assets. Using a novel bank-level dataset and an IV strategy that exploits the vulnerability of these requirements to sovereign intervention, I find that higher liquidity requirements increase default risk over the long run, with Z-scores falling by about 27% over five years. The effect operates mainly through profitability losses from holding low-yielding liquid assets, but responses differ across banks: undercapitalized banks adjust more aggressively in favor of liquid assets and face smaller risk increases, while state-owned banks’ exposure depends on recapitalization prospects. These findings underscore the dual role of liquidity regulation—undermining stability in general, but also mitigating fragility under certain balance sheet and institutional conditions.

The Macroeconomic effects of Liquidity Regulation: Evidence from an Emerging Economy [PDF]

Presentations: Krea University RSFE 2025 | Vietnam Symposium in Banking and Finance 2025 (withdrawn)

Abstract: This paper investigates the macroeconomic effects of liquidity regulation by studying changes in India’s Statutory Liquidity Ratio (SLR) between 1951 and 2023. Using a narrative identification strategy to isolate exogenous policy shifts, combined with a local projections framework estimated via instrumental variables, I examine the dynamic effects of SLR changes on key macroeconomic and financial variables. The results indicate that increases in the SLR lead to a significant contraction in real GDP in the medium run, alongside persistent inflationary pressures and a tightening of monetary and credit conditions. These effects are asymmetric: tightening actions produce strong and persistent macro-financial responses, while loosening actions yield muted effects. I identify two main transmission channels—portfolio reallocation on the asset side, with a shift from long-term to short-term lending, and adjustments in funding structure, including increased reliance on deposit mobilization and reduced use of money market borrowings. These findings provide fresh insights into the real effects of liquidity regulation, a dimension that remains relatively underexplored compared to its regulatory counterparts such as capital requirements.

The more, the worse: Central Bank Balance sheet policies and Excess Liquidity in Sub-Saharan Africa [PDF]

(with Melesse M. Tashu and Charalambos G. Tsangarides, IMF)

Presentations: YSI Workshop on Fiscal and Monetary Coordination 2025 | Kiel-CEPR African  Economic Development Conference 2025 (Scheduled)

Abstract: The persistence of excess liquidity in Sub-Saharan Africa (SSA) poses significant challenges for effective monetary policy transmission. While existing literature emphasizes demand-side drivers such as precautionary motives, this paper highlights the role of involuntary, supply-driven liquidity arising from central bank balance sheet policies. We identify exogenous reserve supply shocks by exploiting cross-country variation in central banks’ net foreign assets (NFA) and net credit to government (NCG) and estimate their effects on liquidity using a panel local projections framework for a sample of 36 SSA countries. Our results show that both NFA and NCG shocks significantly increase excess liquidity, with NFA effects being more persistent. These shocks account for approximately 21 percent of the variation in excess liquidity. The effects are larger in resource-rich economies with rigid exchange rate regimes and weak sterilization but muted in countries with stronger institutions. Additionally, reserve supply shocks raise short-term interest rate volatility. Our findings underscore the need for institutional reforms to strengthen liquidity management and policy effectiveness.