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Liquidity Requirements, Liquidity Choice and Financial Stability

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  • Douglas W. Diamond
  • Anil K. Kashyap

Abstract

We study a modification of the Diamond and Dybvig (1983) model in which the bank may hold a liquid asset, some depositors see sunspots that could lead them to run, and all depositors have incomplete information about the bank’s ability to survive a run. The incomplete information means that the bank is not automatically incentivized to always hold enough liquid assets to survive runs. Regulation similar to the liquidity coverage ratio and the net stable funding ratio (that are soon be implemented) can change the bank’s incentives so that runs are less likely. Optimal regulation would not mimic these rules.

Suggested Citation

  • Douglas W. Diamond & Anil K. Kashyap, 2016. "Liquidity Requirements, Liquidity Choice and Financial Stability," NBER Working Papers 22053, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:22053
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    References listed on IDEAS

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    7. Uhlig, Harald, 2010. "A model of a systemic bank run," Journal of Monetary Economics, Elsevier, vol. 57(1), pages 78-96, January.
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    Cited by:

    1. M. Birn & M. Dietsch & D. Durant, 2017. "How to reach all Basel requirements at the same time?," Débats économiques et financiers 28, Banque de France.
    2. Guillermo Ordonez & Selman Erol, 2017. "Network Reactions to Banking Regulations," 2017 Meeting Papers 1125, Society for Economic Dynamics.
    3. repec:sgm:pzwzuw:v:15:i:66:y:2017:p:53-63 is not listed on IDEAS

    More about this item

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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