Illiquidity, insolvency, and banking regulation
AbstractThis paper provides a compact framework for banking regulation analysis in the presence of uncertainty between systemic liquidity and solvency shocks. It explains the asset price anomalies and bank lending freeze during the crisis. The paper shows how the coexistence of illiquidity and insolvency problems adds extra cost for banking regulation, making conventional regulatory policies fail, and why the unconventional central bank policy encourages moral hazard. A banking tax is proposed to cover the extra regulatory cost, and the regulatory cost can also be reduced by combining the advantages of several instruments.
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Bibliographic InfoPaper provided by Norges Bank in its series Working Paper with number 2011/13.
Length: 38 pages
Date of creation: 21 Nov 2011
Date of revision:
Liquidity risk; Insolvency risk; Liquidity regulation; Equity requirement; Banking tax;
Other versions of this item:
- E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
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- Patrick Bolton & Tano Santos & Jose A. Scheinkman, 2011.
"Outside and Inside Liquidity,"
The Quarterly Journal of Economics,
Oxford University Press, vol. 126(1), pages 259-321.
- Acharya, Viral V., 2009.
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Journal of Financial Stability,
Elsevier, vol. 5(3), pages 224-255, September.
- Acharya, Viral V., 2009. "A Theory of Systemic Risk and Design of Prudential Bank Regulation," CEPR Discussion Papers 7164, C.E.P.R. Discussion Papers.
- Viral V. Acharya & Tanju Yorulmazer, 2008.
"Cash-in-the-Market Pricing and Optimal Resolution of Bank Failures,"
Review of Financial Studies,
Society for Financial Studies, vol. 21(6), pages 2705-2742, November.
- Viral Acharya & Tanju Yorulmazer, 2007. "Cash-in-the-market pricing and optimal resolution of bank failures," Bank of England working papers 328, Bank of England.
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