Eijffinger, Sylvester; Nijskens, R.G.M. - Tilburg University, Center for Economic Research - 2010
Banking regulation has proven to be inadequate to guard systemic stability in the recent financial crisis. Central …. Using a model of a systemic bank suffering from liquidity shocks, we find that the unregulated bank keeps too much liquidity … induces moral hazard. Therefore, we introduce a fiscal authority that is able to bail out the bank by injecting capital. This …