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Some Key Principles of Bank Liquidity Regulation

Douglas J. Elliott

The recent severe financial crisis demonstrated yet again that banks need to maintain conservative levels of liquidity in order to protect themselves against large, unexpected calls for cash. Prior to the last crisis, many financial institutions acted on the assumption, supported by the experience of a number of years, that liquidity would always be readily available in the markets. When that liquidity dried up, they ran into serious trouble, including outright failure.

This Policy Brief outlines my views on the key policy issues surrounding bank liquidity requirements. It complements a lengthy primer on liquidity requirements (see https://www.brookings.edu/research/papers/2014/06/23-bank-liquidity-requirements-intro-overview-elliott). This brief makes the following points:

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