On the economics of committed liquidity facilities

No 439, BIS Working Papers from Bank for International Settlements

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.

Keywords: Basel III; liquidity regulation; liquidity premium; liquidity coverage ratio; committed liquidity facility (search for similar items in EconPapers)
Pages: 29 pages
Date: 2014-01
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac, nep-mon and nep-sog
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Citations: View citations in EconPapers (4)

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Related works:
Chapter: On the Economics of Committed Liquidity Facilities (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:bis:biswps:439

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