How Should Bank Liquidity Be Regulated?

29 Pages Posted: 21 Apr 2017

See all articles by Franklin Allen

Franklin Allen

Imperial College London

Douglas M. Gale

New York University (NYU) - Department of Economics

Date Written: January 27, 2017


Before the crisis, bank regulation relied to a large extent on capital regulation. Liquidity regulation was not widely used. The liquidity problems during the crisis led to calls for liquidity regulation. As a result, the Basel III accord introduced global liquidity standards. An important issue in the construction of such liquidity regulations is the exact nature of the problem they are trying to solve. What is the market failure they are designed to correct? Why is the provision of liquidity that the market provides insufficient? This paper considers the literature analyzing liquidity regulation. There is no wide agreement on the rationale for liquidity regulation.

JEL Classification: G38

Suggested Citation

Allen, Franklin and Gale, Douglas M., How Should Bank Liquidity Be Regulated? (January 27, 2017). Available at SSRN: or

Franklin Allen (Contact Author)

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Douglas M. Gale

New York University (NYU) - Department of Economics ( email )

269 Mercer Street, 7th Floor
New York, NY 10011
United States
(212) 998-8944 (Phone)
(212) 995-3932 (Fax)

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