This paper examines the optimal design of and interaction between capital and liquidity regulations in a model … characterized by fire sale externalities. In the model, banks can insure against potential liquidity shocks by hoarding sufficient … precautionary liquid assets. However, it is never optimal to fully insure, so realized liquidity shocks trigger an asset fire sale …

regulatory requirements. Our analytic characterization of the bank policy choices shows that imposing solely liquidity … requirements leads to lower bank losses in default at the cost of an increased likelihood of default. Combining liquidity …We develop a dynamic model of banking to assess the effects of liquidity and leverage requirements on banks' insolvency …

deteriorate further, which could require significant bank recapitalisation. Updated bottom-up (i.e. loan by loan) stress tests are … assumptions should be made public. The creation of the Bank Asset Management Company (BAMC) should allow recognition of problems …