Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/107894
Authors: 
Arping, Stefan
Year of Publication: 
2015
Series/Report no.: 
Tinbergen Institute Discussion Paper 15-020/IV
Abstract: 
I study a model of market-liquidity provision by levered intermediaries that, besides operating trading desks, run deposit-taking franchises. Levered intermediariesÂ’ heightened incentive to absorb risk helps to counteract liquidity-provision frictions that, in an unlevered economy, would lead to price distortions and suppressed levels of asset origination ex ante. However, liquidity provision may also overshoot, leading to unhealthy price bubbles and causing asset origination to become excessive. Capital requirements are no panacea: They can spur risk taking and make bubbles bubblier. Ring fencing of trading activities can be, but is not necessarily, undesirable.
Subjects: 
Market Liquidity
Capital Requirements
Volcker Rule
Ring Fencing
JEL: 
G12
G14
G21
G24
Document Type: 
Working Paper

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