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On the economics of committed liquidity facilities

Author

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  • Morten Bech
  • Todd Keister

Abstract

We study the effects of the new Basel III liquidity regulations in jurisdictions with a limited supply of high-quality liquid assets. Using a model based on Bech and Keister (2013), we show how introducing a liquidity coverage ratio in such settings can have significant side effects, leading to a large liquidity premium and pushing the short-term interest rate to the floor of the central bank's rate corridor. Adding a committed liquidity facility allows the central bank to mitigate these effects. By pricing committed liquidity appropriately, the central bank can determine either the equilibrium liquidity premium or the quantity of liquid assets held by banks, but not both. We argue that the optimal pricing arrangement will depend on local market conditions.

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  • Morten Bech & Todd Keister, 2014. "On the economics of committed liquidity facilities," BIS Working Papers 439, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:439
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    References listed on IDEAS

    as
    1. Alexandra Heath & Mark Manning, 2012. "Financial Regulation and Australian Dollar Liquid Assets," RBA Bulletin (Print copy discontinued), Reserve Bank of Australia, pages 43-52, September.
    2. William Poole, 1968. "Commercial Bank Reserve Management In A Stochastic Model: Implications For Monetary Policy," Journal of Finance, American Finance Association, vol. 23(5), pages 769-791, December.
    3. Whitesell, William, 2006. "Interest rate corridors and reserves," Journal of Monetary Economics, Elsevier, vol. 53(6), pages 1177-1195, September.
    4. Morten Bech & Todd Keister, 2012. "On the liquidity coverage ratio and monetary policy implementation," BIS Quarterly Review, Bank for International Settlements, December.
    5. Todd Keister & Antoine Martin & James J. McAndrews, 2008. "Divorcing money from monetary policy," Economic Policy Review, Federal Reserve Bank of New York, vol. 14(Sep), pages 41-56.
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    Cited by:

    1. Anne-Marie Rieu-Foucault, 2017. "Point sur la fourniture de liquidié publique," Working Papers hal-04141643, HAL.
    2. Bech, Morten & Keister, Todd, 2017. "Liquidity regulation and the implementation of monetary policy," Journal of Monetary Economics, Elsevier, vol. 92(C), pages 64-77.
    3. Vilma Dingova & Vaclav Hausenblas & Zlatuse Komarkova, 2014. "Collateralization and Financial Stability," Occasional Publications - Chapters in Edited Volumes, in: CNB Financial Stability Report 2013/2014, chapter 0, pages 137-147, Czech National Bank.
    4. Fuhrer, Lucas Marc & Müller, Benjamin & Steiner, Luzian, 2017. "The Liquidity Coverage Ratio and security prices," Journal of Banking & Finance, Elsevier, vol. 75(C), pages 292-311.
    5. Anne-Marie Rieu-Foucault, 2017. "Point sur la fourniture de liquidié publique," EconomiX Working Papers 2017-27, University of Paris Nanterre, EconomiX.

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    More about this item

    Keywords

    Basel III; liquidity regulation; liquidity premium; liquidity coverage ratio; committed liquidity facility;
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