Bank liquidity and the cost of debt

Sam Miller () and Rhiannon Sowerbutts
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Sam Miller: Bank of England, Postal: Bank of England, Threadneedle Street, London, EC2R 8AH

No 707, Bank of England working papers from Bank of England

Abstract: Since the 2007–09 crisis, tougher bank liquidity regulation has been imposed which aims to ensure banks can survive a severe funding stress. Critics of this regulation suggest that it raises the cost of maturity transformation and reduces productive lending. In this paper we build a bank run model with a unique equilibrium where solvent banks can fail due to illiquidity. We endogenise banks’ funding costs as a function of their liquid asset holdings and show how they are negatively related to liquidity, therefore offsetting some of the costs from higher liquidity requirements. We find evidence for this relationship using post-crisis data for US banks, implying that liquidity requirements may be less costly than previously thought.

Keywords: Bank runs; global games; liquidity (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2018-01-19, Revised 2018-10-09
New Economics Papers: this item is included in nep-ban and nep-cfn
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:boe:boeewp:0707

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