How Should Bank Liquidity Be Regulated?

Before the crisis, bank regulation relied to a large extent on capital regulation. Liquidity regulation was not widely used. The liquidity problems during the crisis led to calls for liquidity regulation. As a result, the Basel III accord introduced global liquidity standards. An important issue in the construction of such liquidity regulations is the exact nature of the problem they are trying to solve. What is the market failure they are designed to correct? Why is the provision of liquidity that the market provides insufficient? This paper considers the literature analyzing liquidity regulation. There is no wide agreement on the rationale for liquidity regulation