Optimal interbank regulation

Arbeitspapier

Recent years have seen renewed interest in the regulation of interbank markets. A review of the literature in this area identifies two gaps: first, the literature has tended to make ad hoc assumptions about the interbank contract space, which makes it difficult to generate convincing policy prescriptions; second, the literature has tended to focus on ex-post interventions that kick in only after an interbank disruption has come underway (e.g., open-market operations, lender-of-lastresort interventions, bail-outs), rather than ex-ante prudential policies. In this paper, I take steps toward addressing both these gaps, namely by building a simple model for the interbank market in which banks optimally choose the form of their interbank contracts. I show that the model delivers episodes that qualitatively resemble the interbank disruptions witnessed during the financial crisis. Some important implications for policy then emerge. In particular, I show that optimal policy requires careful coordination between ex-post and ex-ante interventions, with the ex-ante component surprisingly doing most of the heavy lifting. This suggests that previous literature has underemphasized the role that ex-ante interventions have to play in optimal interbank regulation.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Bank of Canada Staff Working Paper ; No. 2017-48

Classification and Topics

• Classification: Wirtschaft ; Financial Crises ; Financial Institutions and Services: General
• Subject: Financial stability ; Financial system regulation and policies

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Carter, Thomas J.
• Event: Veröffentlichung
• (who): Bank of Canada
• (where): Ottawa
• (when): 2017

Further information

• DOI: doi:10.34989/swp-2017-48
• Handle: http://hdl.handle.net/10419/197854
• Last update: 10.03.2025, 11:42 AM CET