Illiquidity, insolvency, and banking regulation
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.
|Date of creation:||21 Nov 2011|
|Date of revision:|
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- Patrick Bolton & Tano Santos & Jose A. Scheinkman, 2011.
"Outside and Inside Liquidity,"
The Quarterly Journal of Economics,
Oxford University Press, vol. 126(1), pages 259-321.
- Patrick Bolton & Tano Santos & Jose A. Scheinkman, 2010. "Outside And Inside Liquidity," Working Papers 1395, Princeton University, Department of Economics, Econometric Research Program..
- Patrick Bolton & Tano Santos & Jose A. Scheinkman, 2009. "Outside and Inside Liquidity," NBER Working Papers 14867, National Bureau of Economic Research, Inc.
- Acharya, Viral V, 2009.
"A Theory of Systemic Risk and Design of Prudential Bank Regulation,"
CEPR Discussion Papers
7164, C.E.P.R. Discussion Papers.
- Acharya, Viral V., 2009. "A theory of systemic risk and design of prudential bank regulation," Journal of Financial Stability, Elsevier, vol. 5(3), pages 224-255, September.
- Viral V. Acharya & Tanju Yorulmazer, 2008.
"Cash-in-the-Market Pricing and Optimal Resolution of Bank Failures,"
Review of Financial Studies,
Society for Financial Studies, vol. 21(6), pages 2705-2742, November.
- Viral Acharya & Tanju Yorulmazer, 2007. "Cash-in-the-market pricing and optimal resolution of bank failures," Bank of England working papers 328, Bank of England.
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