Abstract

http://ssrn.com/abstract=1315612
 
 

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Cash-in-The-Market Pricing and Optimal Resolution of Bank Failures


Viral V. Acharya


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

Tanju Yorulmazer


Federal Reserve Bank of New York

November 2008

The Review of Financial Studies, Vol. 21, Issue 6, pp. 2705-2742, 2008

Abstract:     
As the number of bank failures increases, the set of assets available for acquisition by surviving banks enlarges but the total liquidity available with surviving banks falls. This results in “cash-in-the-market” pricing for liquidation of banking assets. At a sufficiently large number of bank failures, and in turn, at a sufficiently low level of asset prices, there are too many banks to liquidate and inefficient users of assets who are liquidity-endowed may end up owning the liquidated assets. In order to avoid this allocation inefficiency, it may be ex-post optimal for the regulator to bail out some failed banks. We show, however, that there exists a policy that involves granting liquidity to surviving banks in the purchase of failed banks, which is equivalent to the bailout policy from an ex-post standpoint. Crucially, this liquidity provision policy gives banks incentives to differentiate, rather than to herd, makes aggregate banking crises less likely, and thereby dominates the bailout policy from an ex-ante standpoint.

Keywords: G21, G28, G38, E58, D62

Accepted Paper Series





Not Available For Download

Date posted: December 15, 2008  

Suggested Citation

Acharya, Viral V. and Yorulmazer, Tanju, Cash-in-The-Market Pricing and Optimal Resolution of Bank Failures (November 2008). The Review of Financial Studies, Vol. 21, Issue 6, pp. 2705-2742, 2008. Available at SSRN: http://ssrn.com/abstract=1315612 or http://dx.doi.org/hhm078

Contact Information

Viral V. Acharya (Contact Author)
New York University - Leonard N. Stern School of Business ( email )
44 West 4th Street
New York, NY NY 10012
United States
HOME PAGE: http://pages.stern.nyu.edu/~sternfin/vacharya/public_html/~vacharya.htm
Centre for Economic Policy Research (CEPR)
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
New York University (NYU) - Department of Finance
Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
Tanju Yorulmazer
Federal Reserve Bank of New York ( email )
33 Liberty Street
New York, NY 10045
United States
HOME PAGE: http://www.ny.frb.org/research/economists/yorulmazer/index.html
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