IDEAS home Printed from https://ideas.repec.org/p/cpr/ceprdp/13631.html
   My bibliography  Save this paper

Inefficiency and Regulation of Private Liquidity

Author

Listed:
  • Benigno, Pierpaolo
  • Robatto, Roberto

Abstract

We propose a simple model to study the efficiency of liquidity creation by financial intermediaries, which can take the form of either safe or risky debt. Liquidity crises arise when risky debt is defaulted on and stops providing liquidity services. Owing to a novel externality related to liquidity premia and the cost of issuing safe debt, the laissez-faire equilibrium is inefficient, characterized by an excessive supply of risky debt. However, the optimal policy requires the regulation of safe debt as well. Capital requirements targeting risky debt alone have unintended welfare-reducing consequences.

Suggested Citation

  • Benigno, Pierpaolo & Robatto, Roberto, 2019. "Inefficiency and Regulation of Private Liquidity," CEPR Discussion Papers 13631, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:13631
    as

    Download full text from publisher

    File URL: https://cepr.org/publications/DP13631
    Download Restriction: CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Javier Bianchi, 2011. "Overborrowing and Systemic Externalities in the Business Cycle," American Economic Review, American Economic Association, vol. 101(7), pages 3400-3426, December.
    2. Jeremy C. Stein, 2012. "Monetary Policy as Financial Stability Regulation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 127(1), pages 57-95.
    3. Christopher A. Hennessy & Toni M. Whited, 2007. "How Costly Is External Financing? Evidence from a Structural Estimation," Journal of Finance, American Finance Association, vol. 62(4), pages 1705-1745, August.
    4. Holmström, Bengt, 2013. "Inside and Outside Liquidity," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262518536, December.
    5. Gofman, Michael, 2017. "Efficiency and stability of a financial architecture with too-interconnected-to-fail institutions," Journal of Financial Economics, Elsevier, vol. 124(1), pages 113-146.
    6. Saki Bigio, 2015. "Endogenous Liquidity and the Business Cycle," American Economic Review, American Economic Association, vol. 105(6), pages 1883-1927, June.
    7. Nataliya Klimenko & Sebastian Pfeil & Jean-Charles Rochet & Gianni De Nicolo, 2016. "Aggregate Bank Capital and Credit Dynamics," Swiss Finance Institute Research Paper Series 16-42, Swiss Finance Institute.
    8. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 24(Win), pages 14-23.
    9. Gertler, Mark & Kiyotaki, Nobuhiro, 2010. "Financial Intermediation and Credit Policy in Business Cycle Analysis," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 11, pages 547-599, Elsevier.
    10. Charles W. Calomiris & Berry Wilson, 2004. "Bank Capital and Portfolio Management: The 1930s "Capital Crunch" and the Scramble to Shed Risk," The Journal of Business, University of Chicago Press, vol. 77(3), pages 421-456, July.
    11. Guillaume Plantin, 2015. "Shadow Banking and Bank Capital Regulation," The Review of Financial Studies, Society for Financial Studies, vol. 28(1), pages 146-175.
    12. Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 51(3), pages 393-414.
    13. Li, Ye, 2017. "Procyclical Finance: The Money View," Working Paper Series 2017-24, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    14. Guido Lorenzoni, 2008. "Inefficient Credit Booms," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 75(3), pages 809-833.
    15. Patrick Bolton & Xavier Freixas, 2000. "Equity, Bonds, and Bank Debt: Capital Structure and Financial Market Equilibrium under Asymmetric Information," Journal of Political Economy, University of Chicago Press, vol. 108(2), pages 324-351, April.
    16. Stefan Nagel, 2016. "The Liquidity Premium of Near-Money Assets," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 131(4), pages 1927-1971.
    17. Gary Gorton, 2017. "The History and Economics of Safe Assets," Annual Review of Economics, Annual Reviews, vol. 9(1), pages 547-586, September.
    18. Robin Greenwood & Samuel G. Hanson & Jeremy C. Stein, 2015. "A Comparative-Advantage Approach to Government Debt Maturity," Journal of Finance, American Finance Association, vol. 70(4), pages 1683-1722, August.
    19. Altinkilic, Oya & Hansen, Robert S, 2000. "Are There Economies of Scale in Underwriting Fees? Evidence of Rising External Financing Costs," The Review of Financial Studies, Society for Financial Studies, vol. 13(1), pages 191-218.
    20. Frederic Malherbe, 2014. "Self-Fulfilling Liquidity Dry-Ups," Journal of Finance, American Finance Association, vol. 69(2), pages 947-970, April.
    21. Gorton, Gary & Pennacchi, George, 1990. "Financial Intermediaries and Liquidity Creation," Journal of Finance, American Finance Association, vol. 45(1), pages 49-71, March.
    22. Benigno, Pierpaolo & Robatto, Roberto, 2019. "Private money creation, liquidity crises, and government interventions," Journal of Monetary Economics, Elsevier, vol. 106(C), pages 42-58.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Benigno, Pierpaolo & Robatto, Roberto, 2019. "Private money creation, liquidity crises, and government interventions," Journal of Monetary Economics, Elsevier, vol. 106(C), pages 42-58.
    2. Kreamer, Jonathan, 2022. "Financial intermediation and the supply of liquidity," Journal of Financial Stability, Elsevier, vol. 61(C).
    3. Thomas M. Eisenbach & Gregory Phelan, 2022. "Fragility of Safe Asset Markets," Staff Reports 1026, Federal Reserve Bank of New York.
    4. Golec, Pascal & Perotti, Enrico, 2017. "Safe assets: a review," Working Paper Series 2035, European Central Bank.
    5. Thomas Philippon, 2015. "Has the US Finance Industry Become Less Efficient? On the Theory and Measurement of Financial Intermediation," American Economic Review, American Economic Association, vol. 105(4), pages 1408-1438, April.
    6. Sushant Acharya & Keshav Dogra & Sanjay R. Singh, 2021. "The financial origins of non-fundamental risk," Working Papers 345, University of California, Davis, Department of Economics.
    7. Hanson, Samuel G. & Shleifer, Andrei & Stein, Jeremy C. & Vishny, Robert W., 2015. "Banks as patient fixed-income investors," Journal of Financial Economics, Elsevier, vol. 117(3), pages 449-469.
    8. Krishnamurthy, Arvind & Vissing-Jorgensen, Annette, 2015. "The impact of Treasury supply on financial sector lending and stability," Journal of Financial Economics, Elsevier, vol. 118(3), pages 571-600.
    9. Luck, Stephan & Schempp, Paul, 2023. "Inefficient liquidity creation," Journal of Financial Intermediation, Elsevier, vol. 53(C).
    10. Sang Rae Kim, 2024. "Financial Crisis as a Run on Profitable Banks," Annals of Economics and Finance, Society for AEF, vol. 25(1), pages 213-250, May.
    11. Stijn Claessens & M Ayhan Kose, 2018. "Frontiers of macrofinancial linkages," BIS Papers, Bank for International Settlements, number 95.
    12. Xiong, Qizhou, 2018. "The liquidity premium of safe assets: The role of government debt supply," IWH Discussion Papers 11/2017, Halle Institute for Economic Research (IWH), revised 2018.
    13. Jackson, Timothy & Pennacchi, George, 2021. "How should governments create liquidity?," Journal of Monetary Economics, Elsevier, vol. 118(C), pages 281-295.
    14. Tetiana Davydiuk, 2017. "Dynamic Bank Capital Requirements," 2017 Meeting Papers 1328, Society for Economic Dynamics.
    15. Sergey Chernenko & Adi Sunderam, 2016. "Liquidity Transformation in Asset Management: Evidence from the Cash Holdings of Mutual Funds," NBER Working Papers 22391, National Bureau of Economic Research, Inc.
    16. DeAngelo, Harry & Stulz, René M., 2015. "Liquid-claim production, risk management, and bank capital structure: Why high leverage is optimal for banks," Journal of Financial Economics, Elsevier, vol. 116(2), pages 219-236.
    17. Bolton, Patrick & Oehmke, Martin, 2019. "Bank resolution and the structure of global banks," LSE Research Online Documents on Economics 90056, London School of Economics and Political Science, LSE Library.
    18. Marcin Kacperczyk & Christophe Pérignon & Guillaume Vuillemey, 2021. "The Private Production of Safe Assets," Journal of Finance, American Finance Association, vol. 76(2), pages 495-535, April.
    19. Gertler, M. & Kiyotaki, N. & Prestipino, A., 2016. "Wholesale Banking and Bank Runs in Macroeconomic Modeling of Financial Crises," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 1345-1425, Elsevier.
    20. Gary Gorton & Guillermo Ordo?ez, 2014. "Collateral Crises," American Economic Review, American Economic Association, vol. 104(2), pages 343-378, February.

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cpr:ceprdp:13631. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://www.cepr.org .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.