(Preliminary draft. Please, do not cite or circulate) Liquidity and risk-taking

The 2007-2008 nancial crisis reminded regulators about the importance of liquidity, leading to the introduction of the ’Liquidity Coverage Ratio’ or the ’Net Stable Funding Ratio’, in the new wave of regulatory guidelines. However, it is uncertain that this requirement will make the systems more resilient. In this paper, we develop a theoretical model in which banks decide on their liquidity structure and its risk prole and nd that increasing liquidity may increase the risk of a bank failure. There is a dual eect