Journal Article

No. 2013-7 | March 05, 2013
Register, Cap and Trade: A Proposal for Containing Systemic Liquidity Risk PDF Icon
(Published in Special Issue Coping with Systemic Risk)

Abstract

A fundamental cause of the global financial crisis was excessive maturity mismatch, notably shadow banking holdings of sub-prime MBS and other structured credit instruments and cross-border Euro area interbank lending to the uncompetitive Euro area periphery. The costs of short term funding do not fully reflect underlying asset risks and this created systemic liquidity and credit risks. This externality can be controlled through the issue of tradable licenses for short term funding. This is a simpler and more efficient way of addressing systemic liquidity risk than the controls on individual institutions proposed by international regulators.

JEL Classification

E44 G28 G21

Citation

Alistair Milne (2013). Register, Cap and Trade: A Proposal for Containing Systemic Liquidity Risk. Economics: The Open-Access, Open-Assessment E-Journal, 7 (2013-7): 1—31. http://dx.doi.org/10.5018/economics-ejournal.ja.2013-7

Assessment

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