The Risk-Taking Channel of Liquidity Regulations and Monetary Policy

Stephan Imhof (), Cyril Monnet and Shengxing Zhang

No 2018-13, Working Papers from Swiss National Bank

Abstract: We develop a theoretical model to study the implications of liquidity regulations and monetary policy on deposit-making and risk-taking. Banks give risky loans by creating deposits that firms use to pay suppliers. Firms and banks can take more or less risk. In equilibrium, higher liquidity requirements always lower risk at the cost of lower investment. Nevertheless, a positive liquidity requirement is always optimal. Monetary conditions affect the optimal size of liquidity requirements, and the optimal size is countercyclical. It is only optimal to impose a 100% liquidity requirement when the nominal interest rate is sufficiently low.

Keywords: Monetary policy; Interest on reserves; Deposit creation; Liquidity requirements (search for similar items in EconPapers)
JEL-codes: E22 E52 G28 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2018
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Working Paper: The Risk-Taking Channel of Liquidity Regulations and Monetary Policy (2018)
Working Paper: The Risk-Taking Channel of Liquidity Regulations and Monetary Policy (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:snb:snbwpa:2018-13

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