Liquidity Regulation and the LCR Premium: Evidence from Repo Market Dynamics in Peru

This paper examines the existence and magnitude of an LCR premium in Peru’s interbank market by exploiting the July 2019 reform that eliminated the punitive outflow weights on repo collateral under the Liquidity Coverage Ratio (LCR). Using daily transactions from January 2019 to February 2020, a Difference-in-Differences (DiD) design reveals repo rates declined by an additional 3–4 basis points (bp) relative to unsecured loans. We then embed this supply-shock in a structural IV-2SLS framework, finding that a 1 percentage point (pp) decrease in the rate increases repo volumes by 2,495.5 mm PEN. Robustness checks —including alternative ±3/4/6-month windows, dynamic DiD and placebo DiD— confirm instrument validity and parallel trends. Post-reform, average monthly repo activity jumped from ~5,800 mm to ~22,400 mm PEN, demonstrating that even modest liquidity-rule adjustments can quickly eliminate the pre-reform penalty on secured funding and reorient banks toward collateralized trades.