Strategic Complementarity, Fragility, and Regulation

By Xavier Vives. Social Science Research Network, 2014

151 citations recorded by the source corpus.

Fragility is affected by how the balance sheet composition of financial intermediaries, the precision of information signals, and market stress parameters all influence the extent of strategic complementarity among investors' strategies. A solvency and a liquidity ratio are required to control the likelihood of insolvency and illiquidity. The solvency requirement must be strengthened in the face of increased competition, whereas the liquidity requirement must be strengthened under more conservative fund managers and higher penalties for fire sales. Greater disclosure may aggravate fragility and require an increase in the liquidity ratio, so regulators should establish prudential and disclosure policies in tandem.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/6c6e0f2120fbdc76a331d73ea49736e3ab0c0036

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Citations in the corpus

Illiquidity Component of Credit Risk (2016, background): “Most relevant for us is Rochet and Vives (2004), together with a followup paper of Vives (2014).”
Liquidity Requirements, Liquidity Choice and Financial Stability (2016, unknown): “Vives (2014) analyzes a question similar to that in Ennis and Keister (2006): what are the efficient combinations of equity capital and liquidity holdings to make a bank safe when it subject to runs based on private information about its solvency?”