The Bank Liquidity Channel of Financial (In)stability

Joshua Bosshardt, Ali Kakhbod and Farzad Saidi

No 16438, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We examine the system-wide effects of liquidity regulation on banks' balance sheets. In the general equilibrium model, banks have to hold liquid assets, and choose among illiquid assets varying in the extent to which they are difficult to value before maturity, e.g., structured securities. By improving the liquidity of interbank markets, tighter liquidity requirements induce banks to invest in such complex assets. We evaluate the welfare properties of combining liquidity regulation with other financial-stability policies, and show that it can complement ex-ante policies, such as asset-specific taxes, whereas it can undermine the benefits of ex-post interventions, such as quantitative easing.

Keywords: Liquidity regulation; Securitization; Interbank markets; Financial stability; Quantitative easing (search for similar items in EconPapers)
JEL-codes: E44 G01 G21 G28 (search for similar items in EconPapers)
Date: 2022-01
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Working Paper: The Bank Liquidity Channel of Financial (In)stability (2021)
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