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Rollover Risk, Liquidity and Macroprudential Regulation

Toni Ahnert ()

Staff Working Papers from Bank of Canada

Abstract: I study rollover risk in the wholesale funding market when intermediaries can hold liquidity ex ante and are subject to fire sales ex post. Precautionary liquidity restores multiple equilibria in a global rollover game. An intermediate liquidity level supports both the usual run equilibrium and an efficient equilibrium. I provide a uniqueness refinement to characterize the privately optimal liquidity choice. Because of fire sales, liquidity holdings are strategic substitutes. Intermediaries free ride on the liquidity of other intermediaries, causing excessive liquidation. A macroprudential authority internalizes the systemic nature of liquidity and restores constrained efficiency by imposing a macroprudential liquidity buffer.

Keywords: Financial Institutions; Financial system regulation and policies (search for similar items in EconPapers)
JEL-codes: G01 G11 G28 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2014
New Economics Papers: this item is included in nep-ban, nep-cba and nep-reg
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Related works:
Journal Article: Rollover Risk, Liquidity and Macroprudential Regulation (2016) Downloads
Working Paper: Rollover risk, liquidity, and macro-prudential regulation (2014) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:14-23

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