On the Economics of Committed Liquidity Facilities

29 Pages Posted: 27 Feb 2014

See all articles by Morten L. Bech

Morten L. Bech

Bank for International Settlements (BIS) - Committee on Payments and Market Infrastructures

Todd Keister

Rutgers, The State University of New Jersey - Department of Economics

Date Written: January 2014

Abstract

We study the effects of the new Basel III liquidity regulations in jurisdictions with a limited supply of high-quality liquid assets. Using a model based on Bech and Keister (2013), we show how introducing a liquidity coverage ratio in such settings can have significant side effects, leading to a large liquidity premium and pushing the short-term interest rate to the floor of the central bank’s rate corridor. Adding a committed liquidity facility allows the central bank to mitigate these effects. By pricing committed liquidity appropriately, the central bank can determine either the equilibrium liquidity premium or the quantity of liquid assets held by banks, but not both. We argue that the optimal pricing arrangement will depend on local market conditions.

Keywords: Basel III, liquidity regulation, liquidity premium, liquidity coverage ratio, committed liquidity facility

JEL Classification: E43, E58, G28

Suggested Citation

Bech, Morten L. and Keister, Todd, On the Economics of Committed Liquidity Facilities (January 2014). BIS Working Paper No. 439, Available at SSRN: https://ssrn.com/abstract=2384454

Morten L. Bech (Contact Author)

Bank for International Settlements (BIS) - Committee on Payments and Market Infrastructures ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland
41612808923 (Phone)

Todd Keister

Rutgers, The State University of New Jersey - Department of Economics ( email )

75 Hamilton Street
New Brunswick, NJ 08901
United States

HOME PAGE: http://econweb.rutgers.edu/tkeister

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