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The Interplay Between Liquidity Regulation, Monetary Policy Implementation and Financial Stability

In: Achieving Financial Stability Challenges to Prudential Regulation

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  • Todd Keister

Abstract

The new international regulatory framework for banks known as Basel III updates existing standards for capital requirements while introducing new standards for regulating and evaluating banks’ leverage and liquidity. In this chapter, I discuss some potential unintended consequences of the new liquidity standards, focusing on the Liquidity Coverage Ratio (LCR). The LCR aims to encourage banks to hold a more liquid portfolio of assets and to limit their reliance on very short-term liabilities. Specifically, it requires each subject bank to hold enough high-quality liquid assets that it could survive a 30-day period of stressed financial conditions — including a partial run by its depositors and other short-term creditors — without having to sell illiquid assets and thereby contribute to fire-sale conditions…

Suggested Citation

  • Todd Keister, 2017. "The Interplay Between Liquidity Regulation, Monetary Policy Implementation and Financial Stability," World Scientific Book Chapters, in: Douglas D Evanoff & George G Kaufman & Agnese Leonello & Simone Manganelli (ed.), Achieving Financial Stability Challenges to Prudential Regulation, chapter 13, pages 173-193, World Scientific Publishing Co. Pte. Ltd..
    • Handle: RePEc:wsi:wschap:9789813223400_0013
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    1. Gara Afonso & Ricardo Lagos, 2015. "Trade Dynamics in the Market for Federal Funds," Econometrica, Econometric Society, vol. 83, pages 263-313, January.
    2. Keister, Todd, 2019. "The interplay between liquidity regulation, monetary policy implementation and financial stability," Global Finance Journal, Elsevier, vol. 39(C), pages 30-38.
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    8. Stephan Kohns, 2017. "Monetary Policy and Financial Stability," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 15(01), pages 17-18, April.
    9. Roc Armenter & Benjamin Lester, 2017. "Excess Reserves and Monetary Policy Implementation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 23, pages 212-235, January.
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    12. William Poole, 1968. "Commercial Bank Reserve Management In A Stochastic Model: Implications For Monetary Policy," Journal of Finance, American Finance Association, vol. 23(5), pages 769-791, December.
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    15. Bech, Morten L. & Klee, Elizabeth, 2011. "The mechanics of a graceful exit: Interest on reserves and segmentation in the federal funds market," Journal of Monetary Economics, Elsevier, vol. 58(5), pages 415-431.
    16. Bech, Morten & Monnet, Cyril, 2016. "A search-based model of the interbank money market and monetary policy implementation," Journal of Economic Theory, Elsevier, vol. 164(C), pages 32-67.
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    Cited by:

    1. Christian Pfister & Jean-Guillaume Sahuc, 2020. "Unconventional monetary policies: A stock-taking exercise," Revue d'économie politique, Dalloz, vol. 130(2), pages 137-169.
    2. Meriläinen, Jari-Mikko & Junttila, Juha, 2020. "The relationship between credit ratings and asset liquidity: Evidence from Western European banks," Journal of International Money and Finance, Elsevier, vol. 108(C).
    3. Roy, Saktinil, 2022. "What drives the systemic banking crises in advanced economies?," Global Finance Journal, Elsevier, vol. 54(C).
    4. Keister, Todd, 2019. "The interplay between liquidity regulation, monetary policy implementation and financial stability," Global Finance Journal, Elsevier, vol. 39(C), pages 30-38.

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    More about this item

    Keywords

    Money and Banking; International Banking; Financial Instititions; Banks; Regulations; Compliance; Financial Crisis; Great Financial Crisis 2008; Microprudential; Macroprudential; Financial Stability;
    All these keywords.

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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