Liquidity Requirements, Liquidity Choice and Financial Stability

Douglas Diamond and Anil Kashyap

No 22053, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: E44 G01 G18 G21 (search for similar items in EconPapers)
Date: 2016-03
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac and nep-mic
Note: CF ME
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Citations: View citations in EconPapers (57)

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Chapter: Liquidity Requirements, Liquidity Choice, and Financial Stability (2016)
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