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.
Author: | Jin Cao, Gerhard Illing |
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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): | Deutsches Urheberrecht |