Abstract: We analyze the interdependent effects of bank capital and liquidity on financial stability in a global game model, where banks are exposed to both solvency and liquidity crises with endogenously determined probabilities. We show that capital and liquidity have ambiguous effects on fragility depending on the nature of the crisis and the initial bank balance sheet composition. We then characterize banks’ balance sheet decisions and show that these may entail an inefficient liquidation of banks’ portfolios and a fire sale externality. Joint capital and liquidity regulation eliminates these inefficiencies only when the cost of bank equity and liquidity is contained and market funding conditions are good.
Agnese Leonello is an economist in the Financial Research Division at the European Central Bank. She holds a Ph.D. in Economics from the European University Institute. Prior to joining the ECB, she was a postdoctoral research fellow at the Wharton Financial Institutions Center. She conducts her research in the areas of financial intermediation, financial crises, financial regulation and competition policy.
Time and Place: November 1, 2018, 16:15,
University of Piraeus, 80 Karaoli & Dimitriou Str., Piraeus, Room:013
More Upcoming Seminars in 2018:
November 8, 2018: Jean-Pierre Zigrand, London School of Economics
November 22, 2018: Francois Derrien, HEC Paris
All Finance Seminars