If liquidity requirements increase, what is likely to happen to this interest rate margin and bank risk?

If liquidity requirements increase, banks are likely to increase their interest rate margins to compensate for the increased cost of maintaining a larger amount of liquid assets. This is because banks would need to hold more cash or other liquid assets, which typically earn less interest than loans or other investments.

As for the risk, it could potentially decrease. This is because having more liquid assets can make a bank more resilient to sudden financial shocks, such as a large number of customers withdrawing their deposits at the same time. However, it could also lead to an increase in risk if the bank seeks to compensate for the lower profitability of liquid assets by making riskier loans or investments.

So, in summary, an increase in liquidity requirements is likely to lead to an increase in interest rate margins and could either increase or decrease bank risk, depending on how the bank responds.