Leverage Constraints and Bank Monitoring: Bank Regulation versus Monetary Policy

Bank leverage constraints can emerge from regulatory capital requirements as well central bank collateral in reserve lending facilities. While these two channels are usually examined separately, we able to compare them with the help of a money creation model which reserves have be acquired settle interbank liabilities. In particular, show that regard monitoring, monetary policy via leads unique channel, cannot replicated by standard requirements. Through this banks expand loan supply and deposit issuance when they face liquidity constraints, raising value their loans tighter monitoring firms. The channel improve welfare beyond regulation. Our results may inform current debates, such design frameworks or question whether remains effective times large reserves.