Liquidity Requirements, Free-Riding, and the Implications for Financial Stability Evidence from the Early 1900s

Mark Carlson and Matthew Jaremski

No 2018-018, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: Maintaining sufficient liquidity in the financial system is vital for financial stability. However, since returns on liquid assets are typically low, individual financial institutions may seek to hold fewer such assets, especially if they believe they can rely on other institutions for liquidity support. We examine whether state banks in the early 1900s took advantage of relatively high cash balances maintained by national banks, due to reserve requirements, to hold less cash themselves. We find that state banks did hold less cash in places where both state legal requirements were lower and national banks were more prevalent.

Keywords: Financial stability; Free-riding; Liquidity requirements; Reserve requirements (search for similar items in EconPapers)
JEL-codes: D40 G38 N21 N41 (search for similar items in EconPapers)
Pages: 17 pages
Date: 2018-03-09
New Economics Papers: this item is included in nep-cba and nep-his
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https://www.federalreserve.gov/econres/feds/files/2018018pap.pdf (application/pdf)

Related works:
Journal Article: Liquidity Requirements, Free‐Riding, and the Implications for Financial Stability Evidence from the Early 1900s (2023)
Working Paper: Liquidity Requirements, Free-Riding, and the Implications for Financial Stability Evidence from the early 1900s (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2018-18

DOI: 10.17016/FEDS.2018.018

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