remains exceptional, and be designed in a way that is compatible with sound incentives in the banking system. rationale for liquidity regulation i would like to begin by briefly highlighting the micro - and macro - prudential benefits that will derive from a new set of liquidity standards. in particular, they should lead to an increase in individual credit institutions ’ liquidity buffers, and reduce the risks posed by maturity transformation. the recent financial crisis provided a dramatic illustration of how liquidity risk materialises. the inadequacies of banks ’ liquidity management became apparent when some markets for long - term debt securities ( including abs, abs cdos, etc. ) experienced a sudden re - pricing, resulting from the fact that risks were not properly reflected in their prices. banks faced bis central bankers ’ speeches substantial liquidity outflows and shortages owing to their excessive exposure to these instruments and their excessive reliance on short - term and volatile secured market funding sources. in the us, this phenomenon mainly materialised as a “ run on repo ” ; 1 in the euro area, it resulted into drying up of foreign currency funding, severe strains in bank unsecured funding, and / or a reduced access to repo through clearing houses. in all cases, the central bank had to step in and to expand its liquidity provision to banks. what does this imply for liquidity regulation? regulations should start from first principles, and we therefore have to identify the market failures or negative externalities that liquidity regulation aims at addressing. i consider that there are three main objectives for liquidity regulation : a ) to reduce the impact of uncertainty on the bank risk profile, b ) to build up liquidity buffers and c ) to mitigate the systemic characteristics of a liquidity crisis. maturity transformation gives rise to liquidity risk since, by definition, a bank engaging in maturity transformation cannot honour sudden and large withdrawal requests by depositors. they may face similar difficulties if interbank market lenders refuse to roll over their loans. such coordination failure may arise not because the depositors or the interbank market participants think the bank is likely to be insolvent, but because they anticipate others will withdraw. 2 the rationale of liquidity requirements is that they reduce the impact of uncertainty on the bank risk profile, since they allow the bank to withstand larger withdrawals. lolr and deposit insurance are other ways to achieve the same means : mitigating the risk of a run. the difference

non - hqla collateral, after haircuts, to satisfy its additional borrowing needs. bech and keister ( 2013 ) extend a standard model of monetary policy implementation to include the new liquidity regulation and they discuss how different types of open market operations affect bank balance sheets and the lcr calculations ; see m. bech and t. keister “ the liquidity coverage ratio and monetary policy implementation ”, bis working papers, 2013. rochet and tirole ( 1996 ) emphasise the role of interbank peer monitoring in reducing borrowers ’ moral hazard and their excessive risk - taking ex post ; see j. - c. rochet and j. tirole “ interbank lending and systemic risk ”, journal of money, credit and banking, vol. 28, no. 4, 1996. hoerova and monnet ( 2011 ) view market bis central bankers ’ speeches money market ( as demand might not be fully matched by supply ) and segmentation in the market between maturities over and below 30 days. at the same time, by reducing liquidity risk, the lcr may lead to lower liquidity risk premia. the overall effect of these two countervailing forces is unclear though. while there could be an overall impact on the difference between short and longer - term rates, to assess the overall impact on the monetary policy transmission, one would need to see whether the transmission from short to longerterm rates would be also affected. however, it remains to be seen whether unsecured lending beyond 30 days will revive after the crisis. as mentioned, this new set of liquidity requirements is expected to have important consequences for limiting solvency risk and encouraging good risk management. in fact, the regulation is expected to bring an overall positive effect on the functioning of the money market by internalising the negative externalities for financial stability and monetary policy, i. e. reducing information asymmetries concerning banks ’ liquidity risk exposure and their liquidity risk bearing capacity, creating the conditions for a better functioning of the money market. 17 this has to be combined with actions ensuring a proper functioning of the money market ( such as oversight of reference rates along the lines recently proposed by the european commission ). it should also be seen as a complement to regulatory reforms that will improve market discipline in other segments of the banks ’ liability structure, such as capital buffers and the new bail - in rules for senior bond - holders and uninsured depositors. and since