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Liquidity policies and systemic risk

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  • Tobias Adrian
  • Nina Boyarchenko

Abstract

The growth of wholesale-funded credit intermediation has motivated liquidity regulations. We analyze a dynamic stochastic general equilibrium model in which liquidity and capital regulations interact with the supply of risk-free assets. In the model, the endogenously time-varying tightness of liquidity and capital constraints generates intermediaries? leverage cycle, influencing the pricing of risk and the level of risk in the economy. Our analysis focuses on liquidity policies? implications for household welfare. Within the context of our model, liquidity requirements are preferable to capital requirements, as tightening liquidity requirements lowers the likelihood of systemic distress without impairing consumption growth. In addition, we find that intermediate ranges of risk-free asset supply achieve higher welfare.

Suggested Citation

  • Tobias Adrian & Nina Boyarchenko, 2014. "Liquidity policies and systemic risk," Staff Reports 661, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:661
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    References listed on IDEAS

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    Cited by:

    1. Marcelo Rezende & Mary-Frances Styczynski & Cindy M. Vojtech, 2016. "The Effects of Liquidity Regulation on Bank Demand in Monetary Policy Operations," Finance and Economics Discussion Series 2016-090, Board of Governors of the Federal Reserve System (U.S.).
    2. Tsuji, Chikashi, 2020. "Correlation and spillover effects between the US and international banking sectors: New evidence and implications for risk management," International Review of Financial Analysis, Elsevier, vol. 70(C).
    3. Daniel Roberts & Asani Sarkar & Or Shachar, 2018. "Bank Liquidity Creation, Systemic Risk, and Basel Liquidity Regulations," Staff Reports 852, Federal Reserve Bank of New York.
    4. Adi Mordel, 2018. "Prudential Liquidity Regulation in Banking-A Literature Review," Discussion Papers 18-8, Bank of Canada.
    5. Simona E. Cociuba & Malik Shukayev & Alexander Ueberfeldt, 2019. "Managing Risk Taking With Interest Rate Policy And Macroprudential Regulations," Economic Inquiry, Western Economic Association International, vol. 57(2), pages 1056-1081, April.
    6. Kok, Christoffer & Darracq Pariès, Matthieu & Hałaj, Grzegorz, 2016. "Bank capital structure and the credit channel of central bank asset purchases," Working Paper Series 1916, European Central Bank.
    7. Cristina Zeldea, 2020. "Modeling the Connection between Bank Systemic Risk and Balance-Sheet Liquidity Proxies through Random Forest Regressions," Administrative Sciences, MDPI, Open Access Journal, vol. 10(3), pages 1-1, August.
    8. Glocker, Christian, 2019. "Do reserve requirements reduce the risk of bank failure?," MPRA Paper 95634, University Library of Munich, Germany.
    9. Sandrine Lecarpentier & Cyril Pouvelle & Olivier de Bandt, 2019. "Determinants of banks' liquidity : a French perspective on market and regulatory ratio interactions," EconomiX Working Papers 2019-18, University of Paris Nanterre, EconomiX.
    10. Jane E. Ihrig & Edward Kim & Ashish Kumbhat & Cindy M. Vojtech & Gretchen C. Weinbach, 2017. "How Have Banks Been Managing the Composition of High-Quality Liquid Assets?," Finance and Economics Discussion Series 2017-092, Board of Governors of the Federal Reserve System (U.S.).
    11. Francisco Covas & John C. Driscoll, 2014. "Bank Liquidity and Capital Regulation in General Equilibrium," Finance and Economics Discussion Series 2014-85, Board of Governors of the Federal Reserve System (U.S.).
    12. Douglas da Rosa München & Herbert Kimura, 2020. "Regulatory Banking Leverage: what do you know?," Working Papers Series 540, Central Bank of Brazil, Research Department.
    13. Jeffrey E. Stambaugh & John Martinez & G. T. Lumpkin & Niyati Kataria, 2017. "How well do EO measures and entrepreneurial behavior match?," International Entrepreneurship and Management Journal, Springer, vol. 13(3), pages 717-737, September.
    14. de Bandt Olivier & Lecarpentier Sandrine & Pouvelle Cyril, 2020. "Determinants of Banks’ Liquidity: a French Perspective on Interactions between Market and Regulatory Requirements," Working papers 782, Banque de France.
    15. Tobias Adrian, 2015. "Discussion of “Systemic Risk and the Solvency-Liquidity Nexus of Banks”," Staff Reports 722, Federal Reserve Bank of New York.

    More about this item

    Keywords

    liquidity regulation; systemic risk; DSGE; financial intermediation;

    JEL classification:

    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G00 - Financial Economics - - General - - - General
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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