|Cao, Jin; Illing, Gerhard (2010): Regulation of systemic liquidity risk. In: Financial Markets and Portfolio Management, Vol. 24, No. 1: pp. 31-48|
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This 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 due to their limited liability. The paper compares different regulatory mechanisms to cope with the externalities. We show that a combination of liquidity regulation ex ante and lender of last resort policy ex post can maximize investor payoff. In contrast, both \"narrow banking\" and imposing equity requirements as a buffer are inferior mechanisms for coping with systemic liquidity risk.
Economics > Chairs > Seminar for Macroeconomics
|Subjects:||300 Social sciences > 330 Economics|
|Deposited On:||15. Apr 2014 08:55|
|Last Modified:||29. Apr 2016 09:17|
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Regulation of Systemic Liquidity Risk. (deposited 11. Jan 2010 23:53)
- Regulation of systemic liquidity risk. (deposited 15. Apr 2014 08:55) [Currently Displayed]