Abstract
Abstract A fundamental cause of the global financial crisis was excessive maturity mismatch, notably shadow banking holdings of sub-prime MBS and other structured credit instruments and crossborder Euro area interbank lending to the uncompetitive Euro area periphery. The costs of short term funding do not fully reflect underlying asset risks and this created systemic liquidity and credit risks. This externality can be controlled through the issue of tradable licenses for short term funding. This is a simpler and more efficient way of addressing systemic liquidity risk than the controls on individual institutions proposed by international regulators.
Highlights
Amongst the most fundamental changes are some of those yet to be implemented: the introduction of global liquidity regulation as part of Basel III, through the imposition of the ‘Liquidity Coverage Ratio’ or LCR and the ‘Net Stable Funding Ratio’ or NSFR;2 and the recent proposals for oversight of shadow banking proposed by the Financial Stability Board
This paper suggests a comprehensive registration of assets and liabilities, which can be used to monitor the extent of aggregate maturity mismatch and its contribution to systemic liquidity risks
This paper proposes registration of short term liabilities as a means for monitoring systemic liquidity risk, with an incentive for comprehensive registration imposed by giving a right of rollover to all unregistered short term borrowing
Summary
This paper proposes the creation of national (currency specific) registers of short term monetary and money-like liabilities, and the use of these registers to control the aggregate amount of maturity mismatch in the financial system. It will be relatively low cost because the creation of a short-term liability register is something that will likely be needed anyway, in order to fulfil the commitment of policy makers and regulatory authorities to ensure that financial institutions issuing short-term liabilities can be resolved without tax-payer support. It has relatively low compliance costs because of the flexibility offered by ‘cap and trade’ to individual institutions.
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