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Liquidity Requirements, Liquidity Choice, and Financial Stability

Author

Listed:
  • Diamond, D.W.
  • Kashyap, A.K.

Abstract

We study a modification of the Diamond and Dybvig (1983) model in which the bank may hold a liquid asset, some depositors see sunspots that could lead them to run, and all depositors have incomplete information about the bank's ability to survive a run. The incomplete information means that the bank is not automatically incentivized to always hold enough liquid assets to survive runs. Regulation similar to the liquidity coverage ratio and the net stable funding ratio (that are soon be implemented) can change the bank's incentives so that runs are less likely. Optimal regulation would not mimic these rules.

Suggested Citation

  • Diamond, D.W. & Kashyap, A.K., 2016. "Liquidity Requirements, Liquidity Choice, and Financial Stability," Handbook of Macroeconomics, Elsevier.
  • Handle: RePEc:eee:macchp:v2-2263
    DOI: 10.1016/bs.hesmac.2016.03.011
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Liquidity Regulation is Back
      by Steve Cecchetti and Kim Schoenholtz in Money, Banking and Financial Markets on 2018-04-02 11:29:18

    Citations

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    as


    Cited by:

    1. M. Birn & M. Dietsch & D. Durant, 2017. "How to reach all Basel requirements at the same time?," Débats économiques et financiers 28, Banque de France.
    2. Guillermo Ordonez & Selman Erol, 2017. "Network Reactions to Banking Regulations," 2017 Meeting Papers 1125, Society for Economic Dynamics.
    3. Christopher Martin & Manju Puri & Alexander Ufier, 2018. "Deposit Inflows and Outflows in Failing Banks: The Role of Deposit Insurance," NBER Working Papers 24589, National Bureau of Economic Research, Inc.
    4. repec:sgm:pzwzuw:v:15:i:66:y:2017:p:53-63 is not listed on IDEAS

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