How does the NSFR regulatory constraint affect profitability and lending? Evidence from EU Banks"

his paper analyzes the relationship between long-term liquidity regulatory constraints, profitability, and lending activities in the EU banking sector. In particular, we examine how Net Stable Funding Ratio (NSFR) liquidity requirements impact the profitability and the core banking activities of 189 banks. Our findings reveal that higher NSFR levels improve profitability and asset quality over time rather than immediately. Additionally, NSFR supports loan growth, highlighting the duality of the Basel III liquidity requirement as a prudential constraint and a performance driver. This study highlights that well-calibrated liquidity regulations can strengthen the financial system while ensuring a stable credit supply.