Unintended Consequences of Post-Crisis Liquidity Regulation

Abstract

Post-crisis liquidity regulations have led to a new realignment among banks, government-sponsored enterprises, and money market funds. Banks increasingly draw liquidity from government-sponsored enterprises known as the Federal Home Loan Banks (FHLBs) to meet the Liquidity Coverage Ratio requirement. The FHLBs, in turn, increasingly obtain liquidity from MMFs because Money Market Reforms discourage MMFs' lending to private institutions. This new realignment may reduce the effectiveness of liquidation regulations and introduce fragility. Our findings highlight the importance of moving the fragmented regulatory landscape towards a more coordinated approach.

Keywords: liquidity regulation, regulatory arbitrage, regulatory design

JEL Classification: G23, G28