IDEAS home Printed from https://ideas.repec.org/p/bis/biswps/439.html
   My bibliography  Save this paper

On the economics of committed liquidity facilities

Author

Listed:
  • Morten Bech
  • Todd Keister

Abstract

We study the effects of the new Basel III liquidity regulations in jurisdictions with a limited supply of high-quality liquid assets. Using a model based on Bech and Keister (2013), we show how introducing a liquidity coverage ratio in such settings can have significant side effects, leading to a large liquidity premium and pushing the short-term interest rate to the floor of the central bank's rate corridor. Adding a committed liquidity facility allows the central bank to mitigate these effects. By pricing committed liquidity appropriately, the central bank can determine either the equilibrium liquidity premium or the quantity of liquid assets held by banks, but not both. We argue that the optimal pricing arrangement will depend on local market conditions.

Suggested Citation

  • Morten Bech & Todd Keister, 2014. "On the economics of committed liquidity facilities," BIS Working Papers 439, Bank for International Settlements.
  • Handle: RePEc:bis:biswps:439
    as

    Download full text from publisher

    File URL: http://www.bis.org/publ/work439.pdf
    File Function: Full PDF document
    Download Restriction: no

    File URL: http://www.bis.org/publ/work439.htm
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Whitesell, William, 2006. "Interest rate corridors and reserves," Journal of Monetary Economics, Elsevier, vol. 53(6), pages 1177-1195, September.
    2. Morten Bech & Todd Keister, 2012. "On the liquidity coverage ratio and monetary policy implementation," BIS Quarterly Review, Bank for International Settlements, December.
    3. William Poole, 1968. "Commercial Bank Reserve Management In A Stochastic Model: Implications For Monetary Policy," Journal of Finance, American Finance Association, vol. 23(5), pages 769-791, December.
    4. Todd Keister & Antoine Martin & James J. McAndrews, 2008. "Divorcing money from monetary policy," Economic Policy Review, Federal Reserve Bank of New York, issue Sep, pages 41-56.
    5. Alexandra Heath & Mark Manning, 2012. "Financial Regulation and Australian Dollar Liquid Assets," RBA Bulletin (Print copy discontinued), Reserve Bank of Australia, pages 43-52, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Fuhrer, Lucas Marc & Müller, Benjamin & Steiner, Luzian, 2017. "The Liquidity Coverage Ratio and security prices," Journal of Banking & Finance, Elsevier, vol. 75(C), pages 292-311.
    2. Anne-Marie Rieu-Foucault, 2017. "Point sur la fourniture de liquidié publique," EconomiX Working Papers 2017-27, University of Paris Nanterre, EconomiX.
    3. Bech, Morten & Keister, Todd, 2017. "Liquidity regulation and the implementation of monetary policy," Journal of Monetary Economics, Elsevier, vol. 92(C), pages 64-77.
    4. Vilma Dingova & Vaclav Hausenblas & Zlatuse Komarkova, 2014. "Collateralization and Financial Stability," Occasional Publications - Chapters in Edited Volumes, in: CNB Financial Stability Report 2013/2014, chapter 0, pages 137-147, Czech National Bank.

    More about this item

    Keywords

    Basel III; liquidity regulation; liquidity premium; liquidity coverage ratio; committed liquidity facility;

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bis:biswps:439. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Beslmeisl). General contact details of provider: http://edirc.repec.org/data/bisssch.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.