Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/120850
Authors: 
Adrian, Tobias
Year of Publication: 
2015
Series/Report no.: 
Staff Report, Federal Reserve Bank of New York 722
Abstract: 
Pierret (2015) presents empirical analysis of the solvency-liquidity nexus for the banking system, documenting that a shock to the level of banks' solvency risk is followed by lower short-term debt. Conversely, higher short-term debt Granger-causes higher solvency risk. These results point toward a tight interaction between solvency and liquidity risk over time. My comments are threefold. First, I suggest improving the identification of shocks in Pierret's vector autoregressive setup. Second, I caution against using the quantitative results as the basis for setting policy. Third, I recommend using theoretical restrictions from macro-finance theories to improve identification and interpretation.
Subjects: 
systemic risk
banking liquidity
capital regulation
liquidity regulation
JEL: 
G01
G21
G28
Document Type: 
Working Paper

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