Abstract
AbstractIn this essay, we analyse the impact of the capital and liquidity regulations and call attention to the fact that the banks' responses might create unintended evil: a reduced supply of bank loans, incentives to securitise assets, and adverse incentives on bank risk monitoring. The conclusion is that privately‐based mechanisms that put most creditors at risk are the best way to increase the soundness of banking markets. It is argued that interbank debt should be put at risk because banks have a comparative advantage in risk monitoring. As putting short‐term interbank at risk increases the danger of sudden deposit withdrawals, a mechanism is needed to extend the maturity of short‐term debt at the time of a credit‐led panic.
Published Version
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