Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/53902
Authors: 
Gauthier, Céline
He, Zhongfang
Souissi, Moez
Year of Publication: 
2010
Series/Report no.: 
Bank of Canada Working Paper 2010,29
Abstract: 
We offer a multi-period systemic risk assessment framework with which to assess recent liquidity and capital regulatory requirement proposals in a holistic way. Following Morris and Shin (2009), we introduce funding liquidity risk as an endogenous outcome of the interaction between market liquidity risk, solvency risk, and the funding structure of banks. To assess the overall impact of different mix of capital and liquidity, we simulate the framework under a severe but plausible macro scenario for different balance-sheet structures. Of particular interest, we find that (1) capital has a decreasing marginal effect on systemic risk, (2) increasing capital alone is much less effective in reducing liquidity risk than solvency risk, (3) high liquid asset holdings reduce the marginal effect of increasing short term liability on systemic risk, and (4) changing liquid asset holdings has little effect on systemic risk when short term liability is sufficiently low.
Subjects: 
Financial stability
Financial system regulation and policies
JEL: 
G01
G21
C15
C81
E44
Document Type: 
Working Paper

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