We develop a theory of bank liquidity (cash reserve) requirements. Because cash is both observable and riskless, greater cash holdings improve bank incentives to manage risk in the remaining, non-cash portfolio of risky assets. In a model with a single bank, cash is held voluntarily to stem...

We study the functioning and possible breakdown of the interbank market in the presence of counterparty risk. We allow banks to have private information about the risk of their assets. We show how banks' asset risk affects funding liquidity in the interbank market. Several interbank market...

We study how banks manage their liquidity among the various assets at their disposal. We exploit the introduction of the ECB’s two-tier system which heterogeneously reduced the cost of additional reserves holdings. We find that the treated banks increase reserve holdings by borrowing on the...

We study the functioning and possible breakdown of the interbank market in the presence of counterparty risk. We allow banks to have private information about the risk of their assets. We show how banks’ asset risk affects funding liquidity in the interbank market. Several interbank market...

We develop a model of interbank lending and borrowing with counterparty risk. The model has two key ingredients. First, liquidity in the banking sector is endogenous, which means that there is an opportunity cost of holding liquid assets. Second, banks are privately informed about the risk of...