It is also clear that liquidity regulation has the potential to generate unintended effects. For example, in periods of stress firms are likely to have multiple incentives to hoard accumulated liquidity, rather than to use it to relieve the funding needs of households and other firms. The upshot would be to exacerbate systemic strains and cause a reduction in economic activity.
This tendency toward liquidity hoarding may be amplified by the very fact of quantitative liquidity requirements, since firms may fear that dipping below those levels even in a period of stress would project weakness to counterparties, investors, and market analysts.