Abstract

http://ssrn.com/abstract=1539740
 
 

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Crisis Resolution and Bank Liquidity


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

Hyun Song Shin


Princeton University - Department of Economics

Tanju Yorulmazer


Federal Reserve Bank of New York

January 20, 2010

Review of Financial Studies, Forthcoming

Abstract:     
What is the effect of financial crises and their resolution on banks' choice of liquidity? When 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. The resulting choice of bank liquidity is counter-cyclical, inefficiently low during economic booms but excessively high during crises. We present evidence consistent with these predictions. While interventions to resolve banking crises may be desirable ex post, they affect bank liquidity in subtle ways: Liquidity support to failed banks or unconditional support to surviving banks reduces incentives to hold liquidity, whereas support to surviving banks conditional on their liquid asset holdings has the opposite effect.

Number of Pages in PDF File: 66

Keywords: Cash, Cash holdings, Hoarding, Systemic risk, Fire sales

JEL Classification: G21, G28, G32, E58, D61

Accepted Paper Series


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Date posted: January 22, 2010  

Suggested Citation

Acharya, Viral V. and Shin, Hyun Song and Yorulmazer, Tanju, Crisis Resolution and Bank Liquidity (January 20, 2010). Review of Financial Studies, Forthcoming. Available at SSRN: http://ssrn.com/abstract=1539740

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
Hyun Song Shin
Princeton University - Department of Economics ( email )
Princeton, NJ 08544-1021
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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