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Liquidity Requirements, Free‐Riding, and the Implications for Financial Stability Evidence from the Early 1900s

Liquidity Requirements, Free‐Riding, and the Implications for Financial Stability Evidence from... Maintaining sufficient liquidity in the financial system is vital for its stability. However, since returns on liquid assets are typically low, individual financial institutions may seek to hold fewer such assets, especially if they believe they can rely on other institutions for liquidity support. We examine whether state banks in the early 1900s took advantage of relatively high cash balances maintained by national banks, due to reserve requirements, to hold less cash themselves. We find that state banks did hold less cash in places where both state legal requirements were lower and national banks were more prevalent. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of money credit and banking Wiley

Liquidity Requirements, Free‐Riding, and the Implications for Financial Stability Evidence from the Early 1900s

Journal of money credit and banking , Volume 55 (1) – Feb 1, 2023

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References (2)

Publisher
Wiley
Copyright
© 2023 The Ohio State University.
ISSN
0022-2879
eISSN
1538-4616
DOI
10.1111/jmcb.12937
Publisher site
See Article on Publisher Site

Abstract

Maintaining sufficient liquidity in the financial system is vital for its stability. However, since returns on liquid assets are typically low, individual financial institutions may seek to hold fewer such assets, especially if they believe they can rely on other institutions for liquidity support. We examine whether state banks in the early 1900s took advantage of relatively high cash balances maintained by national banks, due to reserve requirements, to hold less cash themselves. We find that state banks did hold less cash in places where both state legal requirements were lower and national banks were more prevalent.

Journal

Journal of money credit and bankingWiley

Published: Feb 1, 2023

Keywords: reserve requirements; liquidity requirements; free‐riding; financial stability

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