EconPapers    
Economics at your fingertips  
 

Optimal Bank Regulation in the Presence of Credit and Run Risk

Anil K. Kashyap, Dimitrios Tsomocos and Alexandros Vardoulakis

No 2017-097, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (US)

Abstract: We modify the Diamond and Dybvig (1983) model of banking to jointly study various regulations in the presence of credit and run risk. Banks choose between liquid and illiquid assets on the asset side, and between deposits and equity on the liability side. The endogenously determined asset portfolio and capital structure interact to support credit extension, as well as to provide liquidity and risk-sharing services to the real economy. Our modifications create wedges in the asset and liability mix between the private equilibrium and a social planner's equilibrium. Correcting these distortions requires the joint implementation of a capital and a liquidity regulation.

Keywords: Bank runs; Capital; Credit risk; Limited liability; Liquidity; Regulation (search for similar items in EconPapers)
JEL-codes: E44 G01 G21 G28 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac and nep-rmg
Date: 2017-09-22
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed

Downloads: (external link)
https://www.federalreserve.gov/econres/feds/files/2017097pap.pdf (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:fip:fedgfe:2017-97

Ordering information: This working paper can be ordered from
http://www.federalre ... /feds/fedsorder.html

DOI: 10.17016/FEDS.2017.097

Access Statistics for this paper

More papers in Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (US) Contact information at EDIRC.
Bibliographic data for series maintained by Ryan Wolfslayer ().

 
Page updated 2019-10-16
Handle: RePEc:fip:fedgfe:2017-97