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Liquidity and Transparency in Bank Risk Management

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  • Lev Ratnovski

Abstract

Banks may be unable to refinance short-term liabilities in case of solvency concerns. To manage this risk, banks can accumulate a buffer of liquid assets, or strengthen transparency to communicate solvency. While a liquidity buffer provides complete insurance against small shocks, transparency covers also large shocks but imperfectly. Due to leverage, an unregulated bank may choose insufficient liquidity buffers and transparency. The regulatory response is constained: while liquidity buffers can be imposed, transparency is not verifiable. Moreover, liquidity requirements can compromise banks' transparency choices, and increase refinancing risk. To be effective, liquidity requirements should be complemented by measures that increase bank incentives to adopt transparency.

Suggested Citation

  • Lev Ratnovski, 2013. "Liquidity and Transparency in Bank Risk Management," IMF Working Papers 13/16, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:13/16
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    3. Agur, Itai, 2014. "Bank risk within and across equilibria," Journal of Banking & Finance, Elsevier, vol. 48(C), pages 322-333.
    4. Alexandru Monahov, 2015. "The Effects of Prudential Supervision on Bank Resiliency and Profits in a Multi-Agent Setting," GREDEG Working Papers 2015-24, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), University of Nice Sophia Antipolis.
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    6. Panetta, I. C. & Porretta, P., 2009. "Il rischio di liquidità: regolamentazione e best practice
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    9. Bushman, Robert M., 2014. "Thoughts on financial accounting and the banking industry," Journal of Accounting and Economics, Elsevier, vol. 58(2), pages 384-395.
    10. Aktug, R. Erdem & Nayar, Nandkumar (Nandu) & Vasconcellos, Geraldo M., 2013. "Is sovereign risk related to the banking sector?," Global Finance Journal, Elsevier, vol. 24(3), pages 222-249.

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