Liquidity Requirements, Liquidity Choice, and Financial Stability

D.W. Diamond and Anil Kashyap

Chapter Chapter 29 in Handbook of Macroeconomics, 2016, vol. 2, pp 2263-2303 from Elsevier

Abstract: We study a modification of the Diamond and Dybvig (1983) model in which the bank may hold a liquid asset, some depositors see sunspots that could lead them to run, and all depositors have incomplete information about the bank's ability to survive a run. The incomplete information means that the bank is not automatically incentivized to always hold enough liquid assets to survive runs. Regulation similar to the liquidity coverage ratio and the net stable funding ratio (that are soon be implemented) can change the bank's incentives so that runs are less likely. Optimal regulation would not mimic these rules.

Keywords: Bank runs; Bank regulation; Liquidity regulation; Net stable funding ratio; Liquidity coverage ratio (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (55)

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Working Paper: Liquidity Requirements, Liquidity Choice and Financial Stability (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:macchp:v2-2263

DOI: 10.1016/bs.hesmac.2016.03.011

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