Central Bank Liquidity Backstops, Bank Regulation, and Risk-Taking by Asset Managers

Iñaki Aldasoro, Wenqian Huang () and Nikola Tarashev ()
Additional contact information
Wenqian Huang: Monetary and Economic Research, Bank for International Settlements, 4051 Basel, Switzerland
Nikola Tarashev: Monetary and Economic Research, Bank for International Settlements, 4051 Basel, Switzerland

Management Science, 2025, vol. 71, issue 11, 9588-9605

Abstract: Central bank liquidity backstops and bank leverage regulation interact across financial intermediaries and states of the world. A backstop is implemented only in some states to grease the wheels of bank dealers that absorb fire sales. It also incentivizes asset managers to take on excessive redemption risk. Regulation binds in other states, in which it hamstrings market making. Because this outcome increases asset managers’ fire sale costs, it reins in their risk-taking. Empirically, we confirm such a disciplining effect of regulation on U.S. money market funds. Theoretically, we derive that the two policy measures complement each other in raising social welfare because they address different sources of redemption-driven losses—fire sale costs for given risk-taking and excessive risk-taking, respectively.

Keywords: investment funds; liquidity assistance; leverage ratio; endogenous risk-taking (search for similar items in EconPapers)
Date: 2025
References: Add references at CitEc
Citations:

Downloads: (external link)
http://dx.doi.org/10.1287/mnsc.2024.06997 (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:inm:ormnsc:v:71:y:2025:i:11:p:9588-9605

Access Statistics for this article

More articles in Management Science from INFORMS Contact information at EDIRC.
Bibliographic data for series maintained by Chris Asher ().