Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/182281
Authors: 
Neyer, Ulrike
Sterzel, André
Year of Publication: 
2018
Series/Report no.: 
DICE Discussion Paper 301
Abstract: 
This paper analyses the impact of different treatments of government bonds in bank liquidity regulation on financial stability. Using a theoretical model, we show that a sudden increase in sovereign default risk may lead to liquidity issues in the banking sector, implying the insolvency of a significant number of banks. Liquidity requirements do not contribute to a more resilient banking sector in the case of sovereign distress. However, the central bank acting as a lender of last resort can prevent illiquid banks from going bankrupt. Then, introducing liquidity requirements in general and repealing the preferential treatment of government bonds in liquidity regulation in particular actually undermines financial stability. The driving force is a regulation-induced change in bank investment behaviour.
Subjects: 
bank liquidity regulation
government bonds
sovereign risk
financial contagion
lender of last resort
JEL: 
G28
G21
G01
ISBN: 
978-3-86304-300-1
Document Type: 
Working Paper
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