Regulation of Systemic Liquidity Risk

Arbeitspapier

The paper provides a baseline model for regulatory analysis of systemic liquidity shocks. We show that banks may have an incentive to invest excessively in illiquid long term projects. In the prevailing mixed strategy equilibrium the allocation is inferior from the investor’s point of view since some banks free-ride on the liquidity provision as a result of limited liability. The paper compares different regulatory mechanisms to cope with the externalities. It is shown that the combination of liquidity regulation ex ante and lender of last resort policy ex post is able to implement the outcome maximizing investor’s payoff. In contrast, both “narrow banking” and imposing equity requirements as buffer are inferior mechanisms for coping with systemic liquidity risk.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Munich Discussion Paper ; No. 2010-1

Classification and Topics

• Classification: Wirtschaft ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages ; Financial Institutions and Services: Government Policy and Regulation
• Subject: Liquidity Regulation ; Systemic risk ; Lender of last resort ; Financial Stability ; Bankenliquidität ; Bankgeschäft ; Kapitaleinkommen ; Bankrisiko ; Systemrisiko ; Bankenaufsicht ; Bankenregulierung ; 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): 2010

Further information

• DOI: doi:10.5282/ubm/epub.11306
• Handle: http://hdl.handle.net/10419/104326
• URN: urn:nbn:de:bvb:19-epub-11306-9
• Last update: 10.03.2025, 11:45 AM CET