Enough liquidity with enough capital - And vice versa?

Arbeitspapier

We study the interplay of capital and liquidity regulation in a general equilibrium setting by focusing on future funding risks. The model consists of a banking sector with long-term illiquid investment opportunities that need to be financed by short-term debt and by issuing equity. Reliance on refinancing long-term investment in the middle of the life-time is risky, since the next generation of potential short-term debt holders may not be willing to provide funding when the return prospects on the long-term investment turn out to be bad. For moderate return risk, equilibria with and without bank default coexist, and bank default is a self-fulfilling prophecy. Capital and liquidity regulation can prevent bank default and may implement the first-best. Yet the former is more powerful in ruling out undesirable equilibria and thus dominates liquidity regulation. Adding liquidity regulation to optimal capital regulation is redundant.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CFS Working Paper Series ; No. 714

Classification and Topics

• Classification: Wirtschaft ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages ; Bankruptcy; Liquidation ; Corporate Finance and Governance: Government Policy and Regulation
• Subject: financial intermediation ; funding risk ; bank default ; banking regulation ; liquidity requirements ; capital requirements

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Gersbach, Hans ; Haller, Hans ; Zelzner, Sebastian
• Event: Veröffentlichung
• (who): Goethe University Frankfurt, Center for Financial Studies (CFS)
• (where): Frankfurt a. M.
• (when): 2023

Further information

• Handle: http://hdl.handle.net/10419/278736
• Last update: 10.03.2025, 11:42 AM CET