Liquidity and Transparency in Bank Risk Management

Author/Editor:

Lev Ratnovski

Publication Date:

January 18, 2013

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

Banks may be unable to refinance short-term liabilities in case of solvency concerns. To manage this risk, banks can accumulate a buffer of liquid assets, or strengthen transparency to communicate solvency. While a liquidity buffer provides complete insurance against small shocks, transparency covers also large shocks but imperfectly. Due to leverage, an unregulated bank may choose insufficient liquidity buffers and transparency. The regulatory response is constained: while liquidity buffers can be imposed, transparency is not verifiable. Moreover, liquidity requirements can compromise banks' transparency choices, and increase refinancing risk. To be effective, liquidity requirements should be complemented by measures that increase bank incentives to adopt transparency.

Series:

Working Paper No. 2013/016

Subject:

Bank solvency Banking Hedging Liquidity requirements Liquidity risk

English

Publication Date:

January 18, 2013

ISBN/ISSN:

9781616356774/1018-5941

Stock No:

WPIEA2013016

Pages:

41

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