Bank liquidity and the cost of debt

Since the 2007–09 crisis, tougher bank liquidity regulation has been imposed which aims to ensure banks can survive a severe funding stress. Critics of this regulation suggest that it raises the cost of maturity transformation and reduces productive lending. Rhiannon Sowerbutts discusses a bank run model with a unique equilibrium where solvent banks can fail due to illiquidity.

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Image courtesy of interviewee. July 25, 2019

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