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Atlanta Marriott Marquis, L507
Hosted By:
Econometric Society
Liquidity Provision
Paper Session
Sunday, Jan. 6, 2019 1:00 PM - 3:00 PM
- Chair: David Skeie, Texas A&M University
Bank Liquidity Management, Collateral Quality and Policies
Abstract
We develop a model in which financial intermediaries hold near-cash assets to protect themselves from shocks. Depending on parameter values, banks may choose to hold too much or too little cash on aggregate compared to the socially optimal amount. The model, therefore, provides a unified framework for thinking, on the one hand, about policy measures that can reduce hoarding of cash by banks and, on the other hand, about liquidity requirements of the type imposed by the new Basel III regulation. Key to our results is a market in which banks can obtain cash by selling or repo-ing their marketable securities. The quantity of cash obtained on this market is determined endogenously by the market value of the marketable securities and is subject to cash-in-the-market pricing. When uncertainty about the value of marketable securities is low, banks hold too little cash and liquidity regulation can achieve a better allocation. When uncertainly about the value of marketable securities is sufficiently high, banks hoard cash leading to a market freeze.The Optimality of Liquidity Requirements and Central Bank Interventions during Banking Crises
Abstract
This paper studies optimal policy during financial crises using a general equilibrium model in which agents are subject to liquidity risk and a fraction of banks become insolvent. Agents with high liquidity needs and deposits at insolvent banks face a binding liquidity constraint, whose tightness depends on the price of liquid assets. A pecuniary externality arises because other agents do not internalize that their choices affect prices, tightening those constraints even more. The optimal policy—a combination of liquidity requirements on banks and asset purchases by the central bank—increases welfare by affecting the cross-sectional allocation of real resources.Federal Reserve Tools for Managing Rates and Reserves
Abstract
The Federal Reserve began the reduction of its balance sheet in October 2017, but the eventual quantity of its outstanding reserves has not yet been decided. We show that the optimal supply of reserves equates banks' deposit rates to the interest rate paid on reserves (IOER). Bank deposit rates are determined by two frictions, banks' liquidity costs and balance sheet costs. Reserves should be reduced until deposit rates rise to the IOER. Raising the Fed's overnight reverse repo rate up to IOER would implement a higher optimal supply of reserves, expediently reduce the overabundance of reserves, and stabilize the volatility of overnight market rates.JEL Classifications
- G3 - Corporate Finance and Governance
- E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit