Mobile Collateral versus Immobile Collateral
In the face of the Lucas Critique, economic history can be used to evaluate policy. We use the experience of the U.S. National Banking Era to evaluate the most important bank regulation to emerge from the financial crisis, the Bank for International Settlement's liquidity coverage ratio (LCR) which requires that (net) short-term (uninsured) bank debt (e.g. repo) be backed one-for-one with U.S. Treasuries (or other high quality bonds). The rule is narrow banking. The experience of the U.S. National Banking Era, which also required that bank short-term debt be backed by Treasury debt one-for-one, suggests that the LCR is unlikely to reduce financial fragility and may increase it.
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Copy CitationGary Gorton and Tyler Muir, "Mobile Collateral versus Immobile Collateral," NBER Working Paper 22619 (2016), https://doi.org/10.3386/w22619.Download Citation
Published Versions
GARY GORTON & TOOMAS LAARITS & TYLER MUIR, 2022. "Mobile Collateral versus Immobile Collateral," Journal of Money, Credit and Banking, vol 54(6), pages 1673-1703.
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