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Illiquidity, insolvency, and banking regulation

Author

Listed:
  • Jin Cao

    (Norges Bank (Central Bank of Norway))

Abstract

This paper provides a compact framework for banking regulation analysis in the presence of uncertainty between systemic liquidity and solvency shocks. It explains the asset price anomalies and bank lending freeze during the crisis. The paper shows how the coexistence of illiquidity and insolvency problems adds extra cost for banking regulation, making conventional regulatory policies fail, and why the unconventional central bank policy encourages moral hazard. A banking tax is proposed to cover the extra regulatory cost, and the regulatory cost can also be reduced by combining the advantages of several instruments.

Suggested Citation

  • Jin Cao, 2011. "Illiquidity, insolvency, and banking regulation," Working Paper 2011/13, Norges Bank.
    • Handle: RePEc:bno:worpap:2011_13
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    File URL: https://www.norges-bank.no/en/news-events/news-publications/Papers/Working-Papers/2011/WP-201113/
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    Cited by:

    1. is not listed on IDEAS
    2. Lukas Scheffknecht, 2013. "Contextualizing Systemic Risk," ROME Working Papers 201317, ROME Network.

    More about this item

    Keywords

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    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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