regulatory liquidity requirements on bank behavior. A multi-stage decision situation allows for considering the interaction … between credit risk and liquidity risk of banks. This interaction is found to make a risk neutral bank behave as if it were … risk averse in an environment where there is no interbank market and liquidity regulation. Introducing a buoyant interbank …

Banks can deal with their liquidity risk by holding liquid assets (self-insurance), by participating in interbank … markets (coinsurance), or by using flexible financing instruments, such as bank capital (risk-sharing). We use a simple model … to show that undiversi fiable liquidity risk, i.e. the liquidity risk that banks are unable to coinsure on interbank …