The Basel 3 Liquidity Coverage Ratio (LCR) is a micro prudential instrument to strengthen the liquidity position of banks. However if in extreme scenarios the LCR becomes a binding constraint, the interaction of bank behaviour with the regulatory rule can have negative externalities. We simulate...

Under the new Basle Capital Accords, regulation takes the form of a contingency rule prescribing a certain level of bank capital contingent on the bank's risk taking behaviour in choosing its asset portfolio. In a simple dynamic model of banking with binding regulation we show that such Basle II...

The EU accession countries have made remarkable progress in developing their financial sectors. Nevertheless, potential risks to banking sector stability remain. We take stock of these risks, with a focus on the challenges posed by the EU accession process. Important potential risks we identify...

This paper focuses on the interaction between regulation and competition in an industrial organisation model. We analyse how capital requirements a.ect the pro.tability of two banks that compete as Cournot duopolists on a market for loans. Bank management of both banks choose optimal levels of...

In a dynamic framework banks compete for customers by setting lending conditions for the loans they supply, taking into account the capital adequacy requirements posed by the regulator. By easing its lending conditions a bank faces a tradeoff between attracting more demand for loans, thus making...

In a dynamic framework banks compete for customers by setting lending conditions for the loans they supply, taking into account the capital adequacy requirements posed by the regulator. By easing its lend- ing conditions a bank faces a tradeoff between attracting more demand for loans, thus...

This paper maps the empirical features of the Loan-to-Deposit (LTD) ratio with an eye on using it in macroprudential policy to mitigate liquidity risk. We inspect the LTD trends and cycles of 11 euro area countries by filtering methods and analyze the interaction between loans and deposits. We...

Empirical evidence shows that some firms may be capital constraint because of capital market imperfections. We therefore extend the business cycle models with frictions `a la Pissarides on the labour market by also introducing symmetric frictions on the capital market. We show that the capital...

I build a small open economy version of the Calvo-type staggered price-setting model with limited asset market participation, and I show that the inverted aggregate demand logic is less likely to apply to small open economies. The equilibrium dynamics of the model are reduced to a representation...

This paper analyses the reforms in the architecture of EMU since the eruption of the euro crisis in 2010. We describe major weaknesses in the original set-up of EMU, such as lack of fiscal discipline, diverging financial cycles and competitiveness positions, and a lack of crisis instruments....