Despite the extensive attention that the Basel capital adequacy standards have received internationally, significant variation exists in the implementation of these standards across countries. Furthermore, a significant number of countries increase or decrease the stringency of capital...

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...