Working Paper: NBER ID: w22619
Authors: Gary Gorton; Tyler Muir
Abstract: In the face of the Lucas Critique, economic history can be used to evaluate policy. We use the experience of the U.S. National Banking Era to evaluate the most important bank regulation to emerge from the financial crisis, the Bank for International Settlement's liquidity coverage ratio (LCR) which requires that (net) short-term (uninsured) bank debt (e.g. repo) be backed one-for-one with U.S. Treasuries (or other high quality bonds). The rule is narrow banking. The experience of the U.S. National Banking Era, which also required that bank short-term debt be backed by Treasury debt one-for-one, suggests that the LCR is unlikely to reduce financial fragility and may increase it.
Keywords: No keywords provided
JEL Codes: E02; E51; G01; N1
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) | financial fragility (G51) |
| historical parallels (B15) | LCR effectiveness (L15) |
| Liquidity Coverage Ratio (LCR) (E51) | new financial instability (F65) |
| scarcity of U.S. Treasuries (H63) | under-issuance of national bank notes (H63) |
| scarcity of U.S. Treasuries (H63) | increased demand deposits (E41) |