Work in Progress

Safe Asset Provision in a Modern Banking System: A Regulatory Perspective.

I develop a quantitative general equilibrium model of the modern banking sector to study how the regulatory framework effectively adapts against the background of rising non-bank financial intermediation and public liquidity provision. A modern banking system is characterized by regulated and unregulated intermediaries. Additionally, the public sector supplies liquidity by issuing safe assets. In this economy, households derive utility directly from liquidity holdings. Safe assets are valued for safety and liquidity. These assets crowd out private liquidity driving convenience yields on bank deposits and non-bank debt. Banks issue insured deposits but face capital constraints while non-banks issue risky debt. Capital constraints on banks lead to higher non-bank leverage increasing risk in the economy. Optimal capital requirements are found to be lower than in previous studies. Heterogeneity within the banking sector and the adverse effects of safe assets explain this result. The specific size of capital requirements depends on general equilibrium effects and the availability of safe assets. Overall liquidity does not change but its composition does.

Presented at Theories and Methods in Macro (2024, Amsterdam), Tinbergen Institute PhD Seminar (2024, Amsterdam), Nova Macro Working Group (2023, Lisbon) and Nova SBE PhD Research Group (2023, Lisbon).