Unintended Consequences of Post-Crisis Liquidity Regulation

60 Pages Posted: 18 Jun 2019 Last revised: 30 Apr 2021

See all articles by Suresh M. Sundaresan

Suresh M. Sundaresan

Columbia Business School - Finance and Economics

Kairong Xiao

Columbia University - Columbia Business School

Date Written: November 1, 2018

Abstract

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

Sundaresan, Suresh M. and Xiao, Kairong, Unintended Consequences of Post-Crisis Liquidity Regulation (November 1, 2018). Available at SSRN: https://ssrn.com/abstract=3400165 or http://dx.doi.org/10.2139/ssrn.3400165

Suresh M. Sundaresan

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States
212-854-4423 (Phone)
212-316-9180 (Fax)

HOME PAGE: http://www0.gsb.columbia.edu/faculty/ssundaresan/

Kairong Xiao (Contact Author)

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

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