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Liquidity and Capital Requirements and the Probability of Bank Failure

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  • Philipp Johann König
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    Abstract

    Using the model of Rochet and Vives (2004), this note shows that a prudential regulator can in general not mitigate a bank’s failure risk solely by means of liquidity requirements. However, their effectiveness can be restored if, in addition, minimum capital requirements are met. This provides a rationale for capital requirements beyond the commonly envoked reasoning that they are to be used to control the riskiness of banks’ asset portfolios.

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    File URL: http://sfb649.wiwi.hu-berlin.de/papers/pdf/SFB649DP2010-027.pdf
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    Bibliographic Info

    Paper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2010-027.

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    Length: 8 pages
    Date of creation: May 2010
    Date of revision:
    Handle: RePEc:hum:wpaper:sfb649dp2010-027

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    Keywords: prudential regulation; liquidity requirements; minimum capital requirements; global games;

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