NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Mobile Collateral versus Immobile Collateral

Gary Gorton, Tyler Muir

NBER Working Paper No. 22619
Issued in September 2016
NBER Program(s):Asset Pricing, Corporate Finance, Development of the American Economy, Economic Fluctuations and Growth, Monetary Economics

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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Document Object Identifier (DOI): 10.3386/w22619

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