Liquidity Rules and Credit Booms

We show that stricter bank liquidity standards can trigger unintended credit booms when there is heterogeneity in interbank pricing power. Attempts to circumvent the regulation change the allocation of savings across institutions, eliciting strategic responses that also change the allocation of lending across markets. More credit is generated per unit of savings in the new equilibrium. A quantitative application to China illustrates the practical relevance of the mechanisms in our model.