Consider a competitive bank whose illiquid asset portfolio is funded by short-term debt that has to be refinanced before the asset matures. We show that in this setting maximal transparency is not socially optimal, and that the existence of social externalities of bank failures further lowers...

We study the effects on credit allocation and bank stability of introducing a leverage ratio requirement (LRR) on top of risk-based capital requirements, as in Basel III. For the current 3% LRR, both low-risk and high-risk loan rates and volumes remain essentially unchanged, because banks...

We show how banks’ excessive risk-taking, stemming from informational asymmetries in loan markets, can lead to an excessive output loss when a recession starts. Risk-based capital requirements can alleviate the output loss by reducing excessive risk-taking in ‘normal’ times. Model...

The NSFR regulation reduces banks’ liquidity risks by encouraging the use of deposit funding. Deposit money is created by lending, but the requirement restricts possibilities to grant loans. This contradiction may be destabilising if there is a substantial foreign debt.

The present crisis has revealed that, as expected, much of the safety net for handling failures in the banking system is deficient, particularly for cross-border banks, and the present problems had to be handled by a range of ad hoc measures. The principal new measure that needs to be undertaken...

This paper analyses the determinants of banks’ loan loss allowances for samples of US banks and three non-US samples: a group of 21 countries, Canada and Japan. The model includes fundamental (or non-discretionary) determinants of the allowance such as non-performing loans, and discretionary...

In this paper we test the hypothesis that credit policies are pro-cyclical. Our approach is based on a stochastic frontier analysis of borrower data, as in Chen and Wang (2008). We extend the applicability of the approach, and propose a novel test specification which is informative of many types...

This paper tests for the presence of a credit channel (particularly a bank-lending sub-channel) for monetary policy in the housing market. We argue that the importance of this channel for investment in residential housing is highly dependent on the structural features, and particularly the...

Building on Cecchetti and Li (2005), we show that the bank lending channel affects monetary policy trade-offs only when interest rates affect marginal costs of production (ie when there is a cost channel of monetary policy) in the New Keynesian monetary policy model. In our calibrated model the...

We study whether the mechanism design in the central bank liquidity auctions matters for the interbank money market interest rate levels and volatility. Furthermore, we compare different mechanisms to sell liquidity in terms of revenue, efficiency and auction stage interest rate levels and...