A Dilemma between Liquidity Regulation and Monetary Policy: Some History and Theory

History suggests a conflict between current Basel III liquidity ratios and monetary policy, which we call the liquidity regulation dilemma. Although forgotten, liquidity ratios, named “securities‐reserve requirements,” were widely used historically, but for monetary policy (not regulatory) reasons,...

Full description

Saved in:
Bibliographic Details
Published in:Journal of money, credit and banking credit and banking, 2023-06, Vol.55 (4), p.915-944
Main Authors: MONNET, ERIC, VARI, MIKLOS
Format: Article
Language:English
Subjects:
availability doctrine
Basel III
central bank history
Central banks
Economics and Finance
Government bonds
Humanities and Social Sciences
Interest rates
Liquidity
liquidity coverage ratio (LCR)
liquidity ratios
Monetary policy
monetary policy implementation
quantitative easing
Regulation
reserve requirements
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:History suggests a conflict between current Basel III liquidity ratios and monetary policy, which we call the liquidity regulation dilemma. Although forgotten, liquidity ratios, named “securities‐reserve requirements,” were widely used historically, but for monetary policy (not regulatory) reasons, as central bankers recognized the contractionary effects of these ratios. We build a model rationalizing historical policies: a tighter ratio reduces the quantity of assets that banks can pledge as collateral, thus increasing interest rates. Tighter liquidity regulation paradoxically increases the need for central bank's interventions. Liquidity ratios were also used to keep yields on government bonds low when monetary policy tightened.
ISSN:0022-2879
1538-4616
DOI:10.1111/jmcb.12930