Chapter 29. Liquidity Requirements Liquidity Choice and Financial Stability We study a modification of the Diamond and Dybvig (1983) model in which the bank may hold a liquid asset some depositors see sunspots that could lead them to run and all depositors have incomplete information about the banks ability to survive a run. The incomplete information means that the bank is not automatically incentivized to always hold enough liquid assets to survive runs. Regulation similar to the liquidity coverage ratio and the net stable funding ratio (that are soon be implemented) can change the banks incentives so that runs are less likely. Optimal regulation would not mimic these rules.