28

1.6 Marks Fls' holding of liquid assets is a constrained optimization because O a. An FI facing little risk of liquidity withdrawals is allowed by regulators to hold less reserve b. Regulators may require Fls to hold more reserves than the privately optimal amount Oc. The liquid asset reserve requirements imposed by regulators set a maximum bound on the level of long-term loans Od. An FI may increase their liquidity risk taking without the reserve requirements