Endogenous Systemic Liquidity Risk

Arbeitspapier

Traditionally, aggregate liquidity shocks are modelled as exogenous events. Extending our previous work (Cao & Illing, 2007), this paper analyses the adequate policy response to endogenous systemic liquidity risk. We analyse the feedback between lender of last resort policy and incentives of private banks, determining the aggregate amount of liquidity available. We show that imposing minimum liquidity standards for banks ex ante are a crucial requirement for sensible lender of last resort policy. In addition, we analyse the impact of equity requirements and narrow banking, in the sense that banks are required to hold sufficient liquid funds so as to pay out in all contingencies. We show that such a policy is strictly inferior to imposing minimum liquidity standards ex ante combined with lender of last resort policy.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Munich Discussion Paper ; No. 2008-9

Classification and Topics

• Classification: Wirtschaft ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages ; Financial Institutions and Services: Government Policy and Regulation
• Subject: Liquidity risk ; Free-riding ; Narrow banking ; Lender of last resort ; Liquidität ; Geldpolitik ; Finanzkrise ; Geldpolitische Transmission ; Geldnachfrage ; Geldtheorie ; Lender of Last Resort ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Cao, Jin ; Illing, Gerhard
• Event: Veröffentlichung
• (who): Ludwig-Maximilians-Universität München, Volkswirtschaftliche Fakultät
• (where): München
• (when): 2008

Further information

• DOI: doi:10.5282/ubm/epub.3358
• Handle: http://hdl.handle.net/10419/104272
• URN: urn:nbn:de:bvb:19-epub-3358-3
• Last update: 10.03.2025, 11:44 AM CET