Crisis Resolution and Bank Liquidity

50 Pages Posted: 8 Dec 2009 Last revised: 16 Jul 2023

See all articles by Viral V. Acharya

Viral V. Acharya

New York University (NYU) - Leonard N. Stern School of Business; New York University (NYU) - Department of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); National Bureau of Economic Research (NBER)

Hyun Song Shin

Bank for International Settlements (BIS)

Tanju Yorulmazer

Koc University

Multiple version iconThere are 5 versions of this paper

Date Written: December 2009

Abstract

What is the effect of financial crises and their resolution on banks' choice of liquid asset holdings? When risky assets have limited pledgeability and banks have relative expertise in employing risky assets, the market for these assets clears only at fire-sale prices following a large number of bank failures. The gains from acquiring assets at fire-sale prices make it attractive for banks to hold liquid assets. We show that the resulting choice of bank liquidity is counter-cyclical, inefficiently low during economic booms but excessively high during crises, and present and discuss evidence consistent with these predictions. Since inefficient users may enter asset markets when prices fall sufficiently, interventions to resolve banking crises may be desirable ex post. However, policies aimed at resolving crises affect ex-ante bank liquidity in subtle ways: while liquidity support to failed banks or unconditional support to surviving banks in acquiring failed banks give banks incentives to hold less liquidity, support to surviving banks that is conditional on their liquid asset holdings creates incentives for banks to hold more liquidity.

Suggested Citation

Acharya, Viral V. and Acharya, Viral V. and Shin, Hyun Song and Yorulmazer, Tanju, Crisis Resolution and Bank Liquidity (December 2009). NBER Working Paper No. w15567, Available at SSRN: https://ssrn.com/abstract=1518760

Viral V. Acharya (Contact Author)

New York University (NYU) - Leonard N. Stern School of Business ( email )

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HOME PAGE: http://www.stern.nyu.edu/~vacharya

New York University (NYU) - Department of Finance ( email )

Stern School of Business
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Centre for Economic Policy Research (CEPR) ( email )

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National Bureau of Economic Research (NBER) ( email )

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Hyun Song Shin

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
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Switzerland

HOME PAGE: http://www.bis.org/author/hyun_song_shin.htm

Tanju Yorulmazer

Koc University ( email )

Rumeli Feneri Yolu
Sariyer, Istanbul, 34450
Turkey

HOME PAGE: http://gsssh.ku.edu.tr/en/departments/economics/akademik-kadro/show/tyorulmazer/

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