Bank Regulation under Fire Sale Externalities
نویسندگان
چکیده
We examine the optimal design of and interaction between capital and liquidity regulations. Banks, not internalizing fire sale externalities, overinvest in risky assets and underinvest in liquid assets in the competitive equilibrium. Capital requirements can alleviate the inefficiency, but banks respond by decreasing their liquidity ratios. When capital requirements are the only available tool, the regulator tightens them to offset banks’ lower liquidity ratios, leading to fewer risky assets and less liquidity compared with the second best. Macroprudential liquidity requirements that complement capital regulations implement the second best, improve financial stability, and allow for more investment in risky assets.
منابع مشابه
Bank regulation under fire sale externalities ∗ Gazi
This paper examines the optimal design of capital and liquidity regulations under fire sale externalities. The lack of complementary liquidity ratio requirements harms the purpose of capital adequacy requirements by yielding not only inefficiently low risky investment but also more severe financial crises. When capital is regulated but liquidity is not, banks still keep liquid assets for micro-...
متن کاملFire-Sale Spillovers and Systemic Risk
We construct a new systemic risk measure that quantifies vulnerability to fire-sale spillovers using detailed regulatory balance sheet data for U.S. commercial banks and repo market data for broker-dealers. Even for moderate shocks in normal times, fire-sale externalities can be substantial. For commercial banks, a 1 percent exogenous shock to assets in 2013:Q1 produces fire-sale externalities ...
متن کاملCournot Fire Sales
In standardWalrasian macro-finance models, pecuniary externalities such as fire sales lead to overinvestment in illiquid assets or underprovision of liquidity. We investigate whether imperfect competition (Cournot) improves welfare through internalizing the externality and find that this is far from guaranteed. In a standard model of liquidity shocks, when liquidity is sufficiently scarce, Cour...
متن کاملWorking Paper No. 458 A network model of financial system resilience
We examine the role of macroeconomic fluctuations, asset market liquidity, and network structure in determining contagion and aggregate losses in a stylised financial system. Systemic instability is explored in a financial network comprising three distinct, but interconnected, sets of agents — domestic banks, overseas banks, and firms. Calibrating the model to advanced country banking sector da...
متن کاملFire effects on composition, density and species diversity vegetation and soil seed bank (Case study: Kangavar rangelands)
Abstract Background and objectives: Fire as a frequent phenomenon in rangelands and because of its complicated and different effects on natural ecosystems, has great importance. Awareness of such fire effects on vegetation cover in point of rangeland management after fire is important and helps better Understanding and sustainable management of rangelands. Changing in plant structure and compo...
متن کامل