Unintended consequences of liquidity regulation

Omar Abdelrahman and Josef Schroth

No 2025-28, Staff Analytical Notes from Bank of Canada

Abstract: When a bank holds a lot of safe assets, it is well situated to deal with funding stress. But when all banks hold a lot of safe assets, a pecuniary externality implies that their (wholesale) funding costs increase. This reduces banks’ ability to hold capital buffers and thus, paradoxically, increases the frequency of funding stress.

Keywords: Business fluctuations and cycles; Credit and credit aggregates (search for similar items in EconPapers)
JEL-codes: E4 E44 E6 G2 G21 G28 (search for similar items in EconPapers)
Date: 2025-12
New Economics Papers: this item is included in nep-fdg
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocsan:25-28

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