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Rollover risk, liquidity, and macro-prudential regulation

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  • Ahnert, Toni

Abstract

I study rollover risk in the wholesale funding market when intermediaries can hold liquidity ex-ante and are subject to fire sales ex-post. I demonstrate that precautionary liquidity restores multiple equilibria in a global rollover game. An intermediate liquidity level supports both the usual run equilibrium and an efficient equilibrium. I provide a uniqueness refinement to characterize the privately optimal liquidity choice. Because of fire sales, liquidity holdings are strategic substitutes. Intermediaries free-ride on the liquidity of other intermediaries, causing excessive liquidation. A macro-prudential authority internalizes the systemic nature of liquidity and restores constrained efficiency by imposing a macro-prudential liquidity buffer. JEL Classification: G01, G11, G28

Suggested Citation

  • Ahnert, Toni, 2014. "Rollover risk, liquidity, and macro-prudential regulation," Working Paper Series 1667, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20141667
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    Cited by:

    1. Christos Argyropoulos & Bertrand Candelon & Jean‐Baptiste Hasse & Ekaterini Panopoulou, 2024. "Towards a macroprudential regulatory framework for mutual funds?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(3), pages 3063-3082, July.
    2. Toni Ahnert & Ali Kakhbod, 2017. "Information Choice and Amplification of Financial Crises," The Review of Financial Studies, Society for Financial Studies, vol. 30(6), pages 2130-2178.
    3. Gerardo Ferrara & Sam Langfield & Zijun Liu & Tomohiro Ota, 2019. "Systemic illiquidity in the interbank network," Quantitative Finance, Taylor & Francis Journals, vol. 19(11), pages 1779-1795, November.
    4. Sebastian Infante & Alexandros Vardoulakis, 2018. "Collateral Runs," Finance and Economics Discussion Series 2018-022, Board of Governors of the Federal Reserve System (U.S.).
    5. Ahnert, Toni & Georg, Co-Pierre, 2018. "Information contagion and systemic risk," Journal of Financial Stability, Elsevier, vol. 35(C), pages 159-171.
    6. Adi Mordel, 2018. "Prudential Liquidity Regulation in Banking-A Literature Review," Discussion Papers 18-8, Bank of Canada.
    7. Jean-Baptiste Hasse & Christelle Lecourt & Souhila Siagh, 2023. "Institutional Stock-Bond Portfolios Rebalancing and Financial Stability," AMSE Working Papers 2322, Aix-Marseille School of Economics, France.
    8. Yang, Hsin-Feng & Liu, Chih-Liang & Yeutien Chou, Ray, 2020. "Bank diversification and systemic risk," The Quarterly Review of Economics and Finance, Elsevier, vol. 77(C), pages 311-326.
    9. Aldasoro, Iñaki & Faia, Ester, 2016. "Systemic loops and liquidity regulation," Journal of Financial Stability, Elsevier, vol. 27(C), pages 1-16.
    10. Eisenbach, Thomas M., 2017. "Rollover risk as market discipline: A two-sided inefficiency," Journal of Financial Economics, Elsevier, vol. 126(2), pages 252-269.
    11. Daron Acemoglu & Asuman Ozdaglar & James Siderius & Alireza Tahbaz-Salehi, 2020. "Systemic Credit Freezes in Financial Lending Networks," NBER Working Papers 27149, National Bureau of Economic Research, Inc.
    12. Toni Ahnert & Benjamin Nelson, 2016. "Opaque Assets and Rollover Risk," Staff Working Papers 16-17, Bank of Canada.
    13. Xuewen Liu, 2018. "Diversification and Systemic Bank Runs," 2018 Meeting Papers 739, Society for Economic Dynamics.
    14. Xuewen Liu, 2023. "A Model of Systemic Bank Runs," Journal of Finance, American Finance Association, vol. 78(2), pages 731-793, April.

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    More about this item

    Keywords

    global games; multiplicity; portfolio choice; wholesale funding;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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