We present a model in which flat (cycle-independent) capital requirements are undesirable because of shocks to bank capital. There is a rationale for countercyclical capital requirements that impose lower capital demands when aggregate bank capital is low. However, such capital requirements also...

We investigate a model of liquidity sources that incorporates a general equilibrium feature of liquidity: when banks hold more liquidity, other sectors of the economy hold less of it and will consequently supply less in times of crisis. The private allocation of liquidity is inefficient and...