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Jointly Optimal Regulation of Bank Capital and Liquidity
Author(s) -
WALTHER ANSGAR
Publication year - 2016
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12305
Subject(s) - leverage (statistics) , basel iii , market liquidity , economics , macroprudential regulation , monetary economics , capital requirement , imperfect , maturity (psychological) , capital (architecture) , systematic risk , financial crisis , systemic risk , microeconomics , finance , macroeconomics , incentive , computer science , psychology , history , developmental psychology , linguistics , philosophy , archaeology , machine learning
In an economy with financial frictions, banks endogenously choose excessive leverage and maturity mismatch in equilibrium, as they fail to internalize the risk of socially wasteful fire sales. Macroprudential regulators can achieve efficiency with simple linear constraints, which require less information than Pigouvian taxes. The liquidity coverage and net stable funding ratios of Basel III can implement efficiency. Additional microprudential regulation of leverage is required when bank failures are socially costly. Micro‐ and macroprudential rules are imperfect substitutes. Optimally, macroprudential policy reacts to systematic risk and credit conditions over the cycle, while microprudential policy reacts to systematic and idiosyncratic risk.