Author
Kara, G. I., Özsoy, Satı Mehmet
Publication Date
2020-06
Publication Place
-
Oxford University Press
Type
Periodical
Language
English
Digital
Yes
Manuscript
No
Library
Özyeğin University
Library Asset ID
0893-9454
Record ID
13cce4cf-78ce-4ec8-9c44-b97e7d9eb612
Library Location
Economics
Date
2020-06
Sample Text
We examine the optimal design of and interaction between capital and liquidity regulations. Banks, not internalizing fire sale externalities, overinvest in risky assets and underinvest in liquid assets in the competitive equilibrium. Capital requirements can alleviate the inefficiency, but banks respond by decreasing their liquidity ratios. When capital requirements are the only available tool, the regulator tightens them to offset banks' lower liquidity ratios, leading to fewer risky assets and less liquidity compared with the second best. Macroprudential liquidity requirements that complement capital regulations implement the second best, improve financial stability, and allow for more investment in risky assets.
DOI
10.1093/rfs/hhz117
Cilt
33
