Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/104330
Authors: 
Cao, Jin
Year of Publication: 
2010
Series/Report no.: 
Munich Discussion Paper 2010-13
Abstract: 
This paper provides a compact framework for banking regulation analysis in the presence of uncertainty between systemic liquidity and solvency shocks. Extending the work by Cao & Illing (2009a, b), it is shown that systemic liquidity shortage arises endogenously as part of the inferior mixed strategy equilibrium. The paper compares dierent traditional regulatory policies which intend to fix the ineciencies, and argues that the co-existence of illiquidity and insolvency problems adds extra cost for banking regulation and makes some schemes that are optimal under pure illiquidity risks (such as liquidity regulation with lender of last resort policy) fail. The regulatory cost can be minimized by combining the advantages of several instruments.
Subjects: 
liquidity risk
insolvency risk
liquidity regulation
equity requirement
JEL: 
E5
G21
G28
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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