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Financial crisis and new dimensions of liquidity risk: rethinking prudential regulation and supervision

Author

Listed:
  • Elisabetta Gualandri

    (Università di Modena e Reggio Emilia)

  • Andrea Landi

    (Università di Modena e Reggio Emilia)

  • Valeria Venturelli

Abstract

This paper aims to stress the importance of market liquidity for the stability of the financial system, emphasizing the pivotal role played by liquidity risk in the development of the current financial crisis, pointing out the flaws of regulation and supervision and stressing the need for their reform. We first investigate the evolution of the concept of liquidity and the nexus between the transformations of financial systems and their increased vulnerability to liquidity risks. Then we focus on the causes of the emergence of liquidity risk in the ongoing financial crisis. We point out two intertwined processes: firstly, the huge increase in financial assets stemming from the shift to an “originate-to-distribute” intermediation model; secondly, the growth of a parallel financial circuit. After this, we focus on the main lessons for regulation and supervision: the case for adjustments to Basel 2, market liquidity and Otc markets, architecture of supervisory authorities and perimeter of controls, coordination, of national liquidity regimes, at least for cross-border groups.

Suggested Citation

  • Elisabetta Gualandri & Andrea Landi & Valeria Venturelli, 2009. "Financial crisis and new dimensions of liquidity risk: rethinking prudential regulation and supervision," BANCARIA, Bancaria Editrice, vol. 7, pages 24-42, July.
    • Handle: RePEc:ban:bancar:v:7:y:2009:m:july:p:24-42
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    File URL: http://www.bancariaeditrice.it/prodotti/vedi/prodotto/id/1974/bancaria-n-7-8-2009
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    More about this item

    JEL classification:

    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • G1 - Financial Economics - - General Financial Markets
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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