Working Paper: NBER ID: w22053
Authors: Douglas W. Diamond; Anil K. Kashyap
Abstract: We study a modification of the Diamond and Dybvig (1983) model in which the bank may hold a liquid asset, some depositors see sunspots that could lead them to run, and all depositors have incomplete information about the bank’s ability to survive a run. The incomplete information means that the bank is not automatically incentivized to always hold enough liquid assets to survive runs. Regulation similar to the liquidity coverage ratio and the net stable funding ratio (that are soon be implemented) can change the bank’s incentives so that runs are less likely. Optimal regulation would not mimic these rules.
Keywords: liquidity regulation; bank stability; financial stability; macroprudential regulation
JEL Codes: E44; G01; G18; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Liquidity Coverage Ratio (LCR) (E51) | Reduced likelihood of bank runs (E44) |
| Net Stable Funding Ratio (NSFR) (G28) | Reduced likelihood of bank runs (E44) |
| Liquidity regulations (G28) | Improved outcomes in terms of financial stability (G51) |
| Regulatory frameworks (G38) | Change in banks' incentives (G21) |
| Regulation alters banks' behavior (G28) | Mitigation of risks of runs (E44) |