Unintended Consequences of Post-Crisis Liquidity Regulation
60 Pages Posted: 18 Jun 2019 Last revised: 30 Apr 2021
Date Written: November 1, 2018
This paper investigates, theoretically and empirically, the effects of post-crisis liquidity regulation on the U.S. banking system. We find that post-crisis liquidity regulation has significantly improved regulated banks’ liquidity. However, liquidity regulation has also crowded out lending and driven some liquidity risks to unregulated intermediaries. Using a model of liquidity regulation with both regulated and unregulated intermediaries, we show the crowding-out effect and liquidity migration can be socially inefficient. A central bank committed liquidity facility can alleviate these unintended consequences by introducing a price-based mechanism.
Keywords: liquidity regulation, regulatory arbitrage, regulatory design
JEL Classification: G23, G28
Suggested Citation: Suggested Citation