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Endogenous systemic liquidity risk

  • Traditionally, aggregate liquidity shocks are modelled as exogenous events. Extending our previous work (Cao & Illing, 2007), this paper analyses the adequate policy response to endogenous systemic liquidity risk. We analyse the feedback between lender of last resort policy and incentives of private banks, determining the aggregate amount of liquidity available. We show that imposing minimum liquidity standards for banks ex ante are a crucial requirement for sensible lender of last resort policy. In addition, we analyse the impact of equity requirements and narrow banking, in the sense that banks are required to hold sufficient liquid funds so as to pay out in all contingencies. We show that such a policy is strictly inferior to imposing minimum liquidity standards ex ante combined with lender of last resort policy.

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Metadaten
Author:Jin Cao, Gerhard Illing
URN:urn:nbn:de:hebis:30-56969
Parent Title (German):Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 2008,23
Series (Serial Number):CFS working paper series (2008, 23)
Document Type:Working Paper
Language:English
Year of Completion:2008
Year of first Publication:2008
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2008/08/15
Tag:Free-Riding; Lender of Last Resort; Liquidity Risk; Narrow Banking
GND Keyword:Liquidität
Issue:This Version: July 2008
Note:
First Version: April 2008 ; This Version: July 2008
HeBIS-PPN:202948854
Institutes:Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
Licence (German):License LogoDeutsches Urheberrecht