Kiwibank Grumpy About Liquidity Regulation

While I'm preparing my submission on the RBNZ's consultation document on non-bank deposit takers (NBDTs) liquidity regulation, Kiwibank has started to complain about the recently introduced quantative liquidity regulations imposed on banks:

Kiwibank has questioned the wisdom of the Reserve Bank leading the world in introducing new bank liquidity rules that have increased funding costs and reduced profits.

The regulations have created a substantial premium for retail deposits onshore, cutting Kiwibank's net interest margin. It appears that the policy has substantial costs for banks and domestic borrowers, but, other than the obvious benefits to domestic bank depositors, what are the social benefits of higher liquidity positions in financial institutions?

To attempt to find a satisfactory answer to this question, I have been analysing what the effects of higher liquidity would be. My results so far seem to suggest it will increase the severity of banking problems. He is how this result is derived:

1. Higher liquidity positions (e.g. higher holdings of liquid assets and/or longer term funding), give a troubled institution more time before they run out of cash.
2. Troubled institutions are normally troubled because of poor investment decisions and poor management (i.e. they can normally be expected to be less efficient institutions with worse management than their competitors)
3. Therefore, the main effect of lighter liquidity positions being required for all financial institutions is to prolong the tenure of poor management, resulting in weaker market discipline and more severe troubles at the point of failure.

I have also figured out the benefit of liquidity regulations to regulators and supervisors: it gives them more time and opportunity to be involved with a failing financial institution. If failure was sudden, people would ask if the regulator was 'asleep at the wheel' or why it didn't know about the problem before it resulted in failure. With liquidity regulations in place, they have time to issue directives and be seen to have taken action, even if (more like when) the institution fails anyway.