FIs' holding of liquid assets is a constrained optimization because

a.

An FI facing little risk of liquidity withdrawals is allowed by regulators to hold less reserve

b.

The liquid asset reserve requirements imposed by regulators set a maximum bound on the level of long-term loans

c.

Regulators may require FIs to hold more reserves than the privately optimal amount

d.

An FI may increase their liquidity risk taking without the reserve requirements