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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/27881
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| Title: | Fire Sales, Foreign Entry and Bank Liquidity |
| Authors: | Acharya, Viral
Shin, Hyun Song
Yorulmazer, Tanju |
| Issue Date: | 6-Feb-2009 |
| Series/Report no.: | FIN-08-035 |
| Abstract: | Bank liquidity is a crucial determinant of the severity of banking
crises. We consider the effect of fire sales and foreign entry during
crises on banks' ex-ante choice of liquid asset holdings. In a setting
with limited pledgeability of risky cash flows and differential
expertise between banks and outsiders in employing banking assets, the
market for assets clears only at fire-sale prices following the onset of
a crisis - and outsiders may enter the market if prices fall
sufficiently low. While fire sales make it attractive for banks to hold
liquid assets, foreign entry reduces this incentive. We show that in
this setting, bank liquidity is counter-cyclical whereas bank capital
measured as bank profits is pro-cyclical. We derive conditions under
which privately optimal levels of bank liquidity are higher or lower
than benchmark levels that maximize total output of the banking sector.
We present and discuss evidence on bank liquidity that is consistent
with model predictions. |
| URI: | http://hdl.handle.net/2451/27881 |
| Appears in Collections: | Finance Working Papers
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