The interdependence of bank capital and liquidity

Elena Carletti, Itay Goldstein and Agnese Leonello

No 19128, BAFFI CAREFIN Working Papers from BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy

Abstract: This paper analyzes the role of liquidity regulation and its interaction with capital requirements. We ?first introduce costly capital in a bank run model with endogenous bank portfolio choice and run probability, and show that capital regulation is the only way to restore the efficient allocation. We then enrich the model to include ?re sales, and show that capital and liquidity regulation are complements. The key implications of our analysis are that the optimal regulatory mix should be designed considering both sides of banks? balance sheet, and that its effectiveness depend on the costs of both capital and liquidity.

Keywords: illiquidity; insolvency; ?re sales; optimal regulation (search for similar items in EconPapers)
JEL-codes: G01 G21 G28 (search for similar items in EconPapers)
Pages: 60
Date: 2019
New Economics Papers: this item is included in nep-ban and nep-cba
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://repec.unibocconi.it/baffic/baf/papers/cbafwp19128.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:baf:cbafwp:cbafwp19128

Access Statistics for this paper

More papers in BAFFI CAREFIN Working Papers from BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy Via Röntgen, 1 - 20136 Milano - Italy. Contact information at EDIRC.
Bibliographic data for series maintained by Michela Pozzi ().