The Risk-Taking Channel of Liquidity Regulations and Monetary Policy

44 Pages Posted: 14 Aug 2018

See all articles by Stephan Imhof

Stephan Imhof

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich

Cyril Monnet

Federal Reserve Bank of Philadelphia

Shengxing Zhang

London School of Economics (LSE) - Department of Economics

Date Written: July 30, 2018

Abstract

We study the implications of liquidity regulations and monetary policy on deposit- making and risk-taking. Banks give risky loans by creating deposits that firms use to pay suppliers. Firms and banks can take more or less risk. In equilibrium, higher liquidity requirements always lower risk at the cost of lower investment. Nevertheless, a positive liquidity requirement is always optimal. Monetary conditions affect the optimal size of liquidity requirements, and the optimal size is countercyclical. It is only optimal to impose a 100% liquidity requirement when the nominal interest rate is sufficiently low.

Suggested Citation

Imhof, Stephan and Monnet, Cyril and Zhang, Shengxing, The Risk-Taking Channel of Liquidity Regulations and Monetary Policy (July 30, 2018). Available at SSRN: https://ssrn.com/abstract=3222526 or http://dx.doi.org/10.2139/ssrn.3222526

Stephan Imhof

ETH Zürich - CER-ETH - Center of Economic Research at ETH Zurich ( email )

Zürichbergstrasse 18
Zurich, 8092
Switzerland

Cyril Monnet

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Shengxing Zhang (Contact Author)

London School of Economics (LSE) - Department of Economics ( email )

Houghton Street
London WC2A 2AE
United Kingdom

HOME PAGE: http://https://sites.google.com/site/oo7zsx/

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