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Liquidity and Transparency in Bank Risk Management

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  • Lev Ratnovski

Abstract

Banks may be unable to refinance short-term liabilities in case of solvency concerns. To manage this risk, banks can accumulate a buffer of liquid assets, or strengthen transparency to communicate solvency. While a liquidity buffer provides complete insurance against small shocks, transparency covers also large shocks but imperfectly. Due to leverage, an unregulated bank may choose insufficient liquidity buffers and transparency. The regulatory response is constained: while liquidity buffers can be imposed, transparency is not verifiable. Moreover, liquidity requirements can compromise banks' transparency choices, and increase refinancing risk. To be effective, liquidity requirements should be complemented by measures that increase bank incentives to adopt transparency.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 13/16.

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Length: 41
Date of creation: 18 Jan 2013
Date of revision:
Handle: RePEc:imf:imfwpa:13/16

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Keywords: Banks; Risk management; Liquidity; Transparency; Economic models; liquidity risk; regulation; Basel III; hedging; hedge; bank transparency; banking; bank liquidity; deposit insurance; hedges; bank funding; bank asset; bank assets; financial economics; bank owner; moral hazard; banking system; bank closure; bank solvency; transmission of monetary policy; risk-free interest rate; bank runs; administrative cost; liquidity crises; bank failure; bank creditors; bank liquidity crises; reserve requirements; banking panics; capital regulation; financial intermediation; bank balance sheets; banking supervision; banking systems; banker; central banking; discounting; risk of bank failure; bank size; bank profit; hedging strategies; bank managers; hedging instrument; bank risk; liability management; bank profits; bank capital; financial markets; banking crisis; bank portfolio; bank incentives; hedging decisions;

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