Liquidity Transformation and Bank Capital Requirements

Hajime Tomura

Staff Working Papers from Bank of Canada

Abstract: This paper presents a dynamic general equilibrium model where asymmetric information about asset quality leads to asset illiquidity. Banking arises endogenously in this environment as banks can pool illiquid assets to average out their idiosyncratic qualities and issue liquid liabilities backed by pooled assets whose total quality is public information. Moreover, the liquidity mismatch in banks' balance sheets leads to endogenous bank capital (outside equity) requirements for preventing bank runs. The model indicates that banking has both positive and negative effects on long-run economic growth and that business-cycle dynamics of asset prices, asset illiquidity and bank capital requirements are interconnected.

Keywords: Financial stability; Financial system regulation and policies (search for similar items in EconPapers)
JEL-codes: D82 E44 G21 (search for similar items in EconPapers)
Pages: 68 pages
Date: 2010
New Economics Papers: this item is included in nep-acc, nep-ban, nep-bec, nep-cba, nep-cta, nep-dge, nep-fdg and nep-mac
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Persistent link: https://EconPapers.repec.org/RePEc:bca:bocawp:10-22

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