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Bank liquidity regulation and the lender of last resort

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  • Ratnovski, Lev

Abstract

Banks can make suboptimal liquidity choices and gamble for lender of last resort (LOLR) support. Endogenous bailout rents are driven by the need to preserve bankers' incentives under uncertain net worth. In equilibrium, banks can herd in risk management, choosing suboptimal liquidity when they expect others to do so. Optimal liquidity can be restored by quantitative requirements, but such regulation is costly. An LOLR policy incorporating bank capital information can reduce distorting rents and allow for a more efficient solution, but may only be possible in transparent economies.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Intermediation.

Volume (Year): 18 (2009)
Issue (Month): 4 (October)
Pages: 541-558

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Handle: RePEc:eee:jfinin:v:18:y:2009:i:4:p:541-558

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Web page: http://www.elsevier.com/locate/inca/622875

Related research

Keywords: Liquidity Bank regulation Lender of last resort Bailout Transparency;

References

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Citations

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Cited by:
  1. López-Espinosa, Germán & Moreno, Antonio & Rubia, Antonio & Valderrama, Laura, 2012. "Short-term wholesale funding and systemic risk: A global CoVaR approach," Journal of Banking & Finance, Elsevier, vol. 36(12), pages 3150-3162.
  2. Ratnovski, Lev, 2013. "Liquidity and transparency in bank risk management," Journal of Financial Intermediation, Elsevier, vol. 22(3), pages 422-439.
  3. Adrian, Tobias & Boyarchenko, Nina, 2014. "Liquidity policies and systemic risk," Staff Reports 661, Federal Reserve Bank of New York.
  4. Diana Bonfim & Moshe Kim, 2012. "Liquidity risk in banking: is there herding?," Working Papers w201218, Banco de Portugal, Economics and Research Department.
  5. Weiß, Gregor N.F. & Bostandzic, Denefa & Neumann, Sascha, 2014. "What factors drive systemic risk during international financial crises?," Journal of Banking & Finance, Elsevier, vol. 41(C), pages 78-96.
  6. Erlend Nier, 2009. "Financial Stability Frameworks and the Role of Central Banks: Lessons from the Crisis," IMF Working Papers 09/70, International Monetary Fund.
  7. Simplice A., Asongu, 2010. "Post-crisis bank liquidity risk management disclosure," MPRA Paper 27266, University Library of Munich, Germany.

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