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Bank Supervisory Goals versus Monetary Policy Implementation

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  • Larry D. Wall

Abstract

The global financial crisis of 2007–09 revealed substantial weaknesses in large banks' capital adequacy and liquidity. Bank regulators responded with a variety of prudential measures intended to strengthen both. However, these prudential measures resulted in conflicts with the implementation of monetary policy that helped alter the way the Federal Reserve conducts monetary policy. I review three such conflicts: regulation inhibiting interest on excess reserves arbitrage starting in 2008, regulation inhibiting banks' operations in the repo market in 2019, and regulation inhibiting their operations in the Treasury securities market in 2020. The article concludes with a discussion of the issues associated with changing specific banking regulations and some more general suggestions for dealing with these types of conflicts.

Suggested Citation

  • Larry D. Wall, 2021. "Bank Supervisory Goals versus Monetary Policy Implementation," Policy Hub, Federal Reserve Bank of Atlanta, vol. 2021(3), pages 1-14, March.
    • Handle: RePEc:fip:a00068:99128
    DOI: 10.29338/ph2021-03
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    References listed on IDEAS

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    1. Kyungmin Kim & Antoine Martin & Ed Nosal, 2020. "Can the U.S. Interbank Market Be Revived?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(7), pages 1645-1689, October.
    2. Larry Wall & Robert Eisenbeis, 1999. "Financial Regulatory Structure and the Resolution of Conflicting Goals," Journal of Financial Services Research, Springer;Western Finance Association, vol. 16(2), pages 223-245, December.
    3. Alyssa G Anderson & John Kandrac, 2018. "Monetary Policy Implementation and Financial Vulnerability: Evidence from the Overnight Reverse Repurchase Facility," The Review of Financial Studies, Society for Financial Studies, vol. 31(9), pages 3643-3686.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    banking regulation; capital adequacy; bank liquidity regulation; interest on reserves; Treasury market; repo market;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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