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Liquidity and Capital Requirements and the Probability of Bank Failure

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  • Philipp Johann König

Abstract

Using the model of Rochet and Vives (2004), this note shows that a prudential regulator can in general not mitigate a bank’s failure risk solely by means of liquidity requirements. However, their effectiveness can be restored if, in addition, minimum capital requirements are met. This provides a rationale for capital requirements beyond the commonly envoked reasoning that they are to be used to control the riskiness of banks’ asset portfolios.

Suggested Citation

  • Philipp Johann König, 2010. "Liquidity and Capital Requirements and the Probability of Bank Failure," SFB 649 Discussion Papers SFB649DP2010-027, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    • Handle: RePEc:hum:wpaper:sfb649dp2010-027
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    File URL: http://sfb649.wiwi.hu-berlin.de/papers/pdf/SFB649DP2010-027.pdf
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    More about this item

    Keywords

    prudential regulation; liquidity requirements; minimum capital requirements; global games;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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