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Jointly optimal regulation of bank capital and liquidity

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Walther, Ansgar (2016) Jointly optimal regulation of bank capital and liquidity. Journal of Money, Credit and Banking, 48 (2-3). pp. 415-448. doi:10.1111/jmcb.12305

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Official URL: http://dx.doi.org/10.1111/jmcb.12305

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Abstract

In an economy with financial frictions, banks endogenously choose excessive leverage and maturity mismatch in equilibrium, as they fail to internalize the risk of socially wasteful fire sales. Macroprudential regulators can achieve efficiency with simple linear constraints, which require less information than Pigouvian taxes. The liquidity coverage and net stable funding ratios of Basel III can implement efficiency. Additional microprudential regulation of leverage is required when bank failures are socially costly. Micro- and macroprudential rules are imperfect substitutes. Optimally, macroprudential policy reacts to systematic risk and credit conditions over the cycle, while microprudential policy reacts to systematic and idiosyncratic risk.

Item Type: Journal Article
Subjects: H Social Sciences > HG Finance
Divisions: Faculty of Social Sciences > Warwick Business School > Finance Group
Faculty of Social Sciences > Warwick Business School
Library of Congress Subject Headings (LCSH): Banks and banking -- Law and legislation, Liquidity (Economics)
Journal or Publication Title: Journal of Money, Credit and Banking
Publisher: Wiley-Blackwell Publishing, Inc.
ISSN: 0022-2879
Official Date: March 2016
Dates:
DateEvent
March 2016Published
20 February 2015Accepted
10 June 2013Submitted
Volume: 48
Number: 2-3
Number of Pages: 34
Page Range: pp. 415-448
DOI: 10.1111/jmcb.12305
Institution: University of Warwick
Status: Peer Reviewed
Publication Status: Published
Access rights to Published version: Restricted or Subscription Access
Funder: Economic and Social Research Council (Great Britain) (ESRC)
Grant number: ES/I901957/1 (ESRC)

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