Liquidity and Capital Requirements and the Probability of Bank Failure
Using the model of Rochet and Vives (2004), this note shows that a prudential regulator can in general not mitigate a bankâ€™s failure risk solely by means of liquidity requirements. However, their effectiveness can be restored if, in addition, minimum capital requirements are met. This provides a rationale for capital requirements beyond the commonly envoked reasoning that they are to be used to control the riskiness of banksâ€™ asset portfolios.
|Date of creation:||May 2010|
|Date of revision:|
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