Discussion Paper

How Liquidity Standards Can Improve Lending of Last Resort Policies


Abstract: Prior to the Great Recession, the focus of bank regulation was on bank capital with little consensus about the need for liquidity regulation. This view was in contrast with an existing body of academic research that pointed to inefficiencies in environments with strictly private provision of liquidity, via either interbank markets or credit line agreements. In spite of theoretical results pointing to the possible benefits of liquidity regulation for reducing fire sales in crises or the risk of panics due to coordination failures, a common view was that its costs might exceed its benefits, especially given a situation in which there is an active lender of last resort (LLR).

Keywords: lender of last resort; liquidity regulation; Liquidity risk;

JEL Classification: G1;G2;

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Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Liberty Street Economics

Publication Date: 2014-04-18

Number: 20140418