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Liquidity and Transparency in Bank Risk Management


Lev Ratnovski


International Monetary Fund

January 3, 2013

Journal of Financial Intermediation, Forthcoming
EFA 2006 Zurich Meetings

Abstract:     
Banks may be unable to refinance short-term liabilities in case of solvency concerns. To manage this risk, banks can accumulate a buffer of liquid assets, or strengthen transparency to communicate solvency. While a liquidity buffer provides complete insurance against small shocks, transparency covers also large shocks but imperfectly. Due to leverage, an unregulated bank may choose insufficient liquidity buffers and transparency. The regulatory response is constrained: while liquidity buffers can be imposed, transparency is not verifiable. Moreover, liquidity requirements can compromise banks' transparency choices, and increase refinancing risk. To be effective, liquidity requirements should be complemented by measures that increase bank incentives to adopt transparency.

Number of Pages in PDF File: 39

Keywords: Banks, Liquidity Risk, Regulation, Transparency, Basel III

JEL Classification: G21, G28, G32

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Date posted: June 14, 2006 ; Last revised: January 9, 2013

Suggested Citation

Ratnovski, Lev, Liquidity and Transparency in Bank Risk Management (January 3, 2013). Journal of Financial Intermediation, Forthcoming; EFA 2006 Zurich Meetings. Available at SSRN: http://ssrn.com/abstract=1012287 or http://dx.doi.org/10.2139/ssrn.1012287

Contact Information

Lev Ratnovski (Contact Author)
International Monetary Fund ( email )
700 19th St NW
Washington, DC 20431
United States
+1 202 623 8213 (Phone)
HOME PAGE: http://ratnovski.googlepages.com
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