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Mobile Collateral versus Immobile Collateral

Author

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  • Gary Gorton
  • Tyler Muir

Abstract

In the face of the Lucas Critique, economic history can be used to evaluate policy. We use the experience of the U.S. National Banking Era to evaluate the most important bank regulation to emerge from the financial crisis, the Bank for International Settlement's liquidity coverage ratio (LCR) which requires that (net) short-term (uninsured) bank debt (e.g. repo) be backed one-for-one with U.S. Treasuries (or other high quality bonds). The rule is narrow banking. The experience of the U.S. National Banking Era, which also required that bank short-term debt be backed by Treasury debt one-for-one, suggests that the LCR is unlikely to reduce financial fragility and may increase it.

Suggested Citation

  • Gary Gorton & Tyler Muir, 2016. "Mobile Collateral versus Immobile Collateral," NBER Working Papers 22619, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:22619
    Note: AP CF DAE EFG ME
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    References listed on IDEAS

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    Cited by:

    1. Farmer, J Doyne & Kleinnijenhuis, Alissa M & Nahai-Williamson, Paul & Wetzer, Thom, 2020. "Foundations of system-wide financial stress testing with heterogeneous institutions," Bank of England working papers 861, Bank of England.
    2. Christopher Curfman & John Kandrac, 2019. "The costs and benefits of liquidity regulations: Lessons from an idle monetary policy tool," Finance and Economics Discussion Series 2019-041, Board of Governors of the Federal Reserve System (U.S.).
    3. Skander Van den Heuvel, 2019. "The Welfare Effects of Bank Liquidity and Capital Requirements," 2019 Meeting Papers 325, Society for Economic Dynamics.
    4. Haelim Anderson & Mark Paddrik & Jessie Jiaxu Wang, 2019. "Bank Networks and Systemic Risk: Evidence from the National Banking Acts," American Economic Review, American Economic Association, vol. 109(9), pages 3125-3161, September.
    5. Maurin, Vincent, 2022. "Asset scarcity and collateral rehypothecation," Journal of Financial Intermediation, Elsevier, vol. 52(C).
    6. Adam Copeland & Darrell Duffie & Yilin Yang, 2021. "Reserves Were Not So Ample After All," Staff Reports 974, Federal Reserve Bank of New York.
    7. Christopher J Curfman & John Kandrac, 2022. "The Costs and Benefits of Liquidity Regulations: Lessons from an Idle Monetary Policy Tool [Crisis resolution and bank liquidity]," Review of Finance, European Finance Association, vol. 26(2), pages 319-353.
    8. Kahn, Charles M. & Wagner, Wolf, 2021. "Sources of Liquidity and Liquidity Shortages," Journal of Financial Intermediation, Elsevier, vol. 46(C).

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    More about this item

    JEL classification:

    • E02 - Macroeconomics and Monetary Economics - - General - - - Institutions and the Macroeconomy
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • G01 - Financial Economics - - General - - - Financial Crises
    • N1 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations

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