Professor Hu is a Professor of Economics at University of Bristol and he was an Assistant Professor in Kellogg School of Management at Northwestern University, 2009-2017. His research interest includes Game Theory, Bounded Rationality, Monetary Economics, Macro Finance, Financial Networks, and Credit Markets


Optimal Banking Regulation with Endogenous Liquidity Provision (with Yiting Li)

📅8 December 2017
14:00 - 15:30 (1 hour 30 minutes)


👤Tai-Wei Hu, Professor of Economics, University of Bristol


In a money-search model where deposits are used as means-of-payments, banks have expertise to obtain higher returns from assets with a cost and an economy of scale but are subject to limited commitment and moral hazard. They can pledge a proportion of asset holdings to issue deposits. Optimal regulation trades off efficiency in asset-management and liquidity service banks provide. An optimal charter system restricts banking licence to crate profits for banks to sustain a leverage ratio above the laissez-faire level to improve liquidity. As moral hazard becomes more serious, optimal regulation allows banks to be larger and have higher profits to compensate for stricter capital requirement due to moral hazard. When banks are heterogeneous, it is optimal to allow higher leverage for larger banks. With uncertainty on bank returns, deposit insurance is optimal as it makes bank liabilities information insensitive. Finally, with moral hazard under deposit insurance, we show that it is not always optimal to exclude gambling behavior in equilibrium.

Coffee/tea & biscuits are available from 1.45pm.


University of Edinburgh Business School
29 Buccleuch Place, Edinburgh, Lothian EH8 9JS, United Kingdom

Further information


👤 Joosung Lee
📞 +44 (0)131 651 1375