Template-type: ReDIF-Paper 1.0
Author-Name: Dr. Stephan Imhof
Author-Name-First: Stephan
Author-Name-Last: Imhof
Author-Name: Cyril Monnet
Author-Name-First: Cyril
Author-Name-Last: Monnet
Author-Name: Shengxing Zhang
Author-Name-First: Shengxing
Author-Name-Last: Zhang
Title: The Risk-Taking Channel of Liquidity Regulations and Monetary Policy
Abstract: We develop a theoretical model to study the implications of liquidity regulations and monetary policy on deposit-making and risk-taking. Banks give risky loans by creating deposits that firms use to pay suppliers. Firms and banks can take more or less risk. In equilibrium, higher liquidity requirements always lower risk at the cost of lower investment. Nevertheless, a positive liquidity requirement is always optimal. Monetary conditions affect the optimal size of liquidity requirements, and the optimal size is countercyclical. It is only optimal to impose a 100% liquidity requirement when the nominal interest rate is sufficiently low.
Length: 48 pages
Creation-Date: 2018
Contact-Email: forschung@snb.ch
File-URL: https://www.snb.ch/en/publications/research/working-papers/2018/working_paper_2018_13
File-Format: text/html
Number: 2018-13
Classification-JEL: E22, E52, G28
Keywords: Monetary policy, Interest on reserves, Deposit creation, Liquidity requirements
Handle: RePEc:snb:snbwpa:2018-13