Basel III Liquidity Regulations and Financial Intermediation in Pakistan

Basel III liquidity standards were issued to augment the sustainability of the banking system. Nevertheless, it is imperative to comprehend the implications of these standards on other significant facets of the banking industry. Hence, this research aimed at identifying the impact of these regulations on the financial intermediation cost of the banking industry of Pakistan. In this research data from seventeen banks have been used for the period 2007 to 2021. A robust fixed effect model has been applied in the study and the robustness of the result is tested by the Driscoll Kraay covariance estimator and two-step difference generalized method of moments (GMM). Results show a significant negative impact of the liquidity coverage ratio and an insignificant impact of the net stable funding ratio on the banking cost of financial intermediation in Pakistan. These results highlight the potential unintended consequences of liquidity regulations on bank costs. Increased demand for high-quality liquid assets may lead to higher asset prices, which could further impact banks’ cost of intermediation. Thus, policymakers should carefully monitor this trend to ensure that it does not result in market distortions or negative consequences for banking costs.