Download this Paper Open PDF in Browser

Crises, Liquidity Shocks, and Fire Sales at Commercial Banks

Financial Management (Forthcoming)

42 Pages Posted: 14 Mar 2012 Last revised: 18 May 2014

Nicole M. Boyson

Northeastern University - D’Amore-McKim School of Business

Jean Helwege

UC Riverside

Jan Jindra

U.S. Securities and Exchange Commission - Division of Economic and Risk Analysis

Date Written: January 30, 2014

Abstract

We investigate two competing explanations for commercial bank distress during financial crises: liquidity shortages and solvency concerns. If liquidity shortages cause distress, a lender of last resort can help by providing funds to banks having trouble rolling over short-term debt and facing potential fire sales. However, if financial crises mainly reduce funding for banks with existing solvency problems, then liquidity provision may not spur lending. Our analysis of commercial banks shows that funding does not typically dry up in a crisis, not even in the recent subprime crisis. Rather, weak banks face declines in capital market borrowing. Further, banks rarely resort to distressed asset sales, instead relying more on deposits and newly issued equity. Banks also engage in cherry picking when choosing assets to sell in crises, as these sales both raise cash and alleviate pressure from regulatory capital requirements.

Keywords: Commercial banks, funding shocks, liquidity shocks, fire sales, financial crisis, cherry picking, insolvency

JEL Classification: G21, G24, G28, G32, G33, E44, E58, E61

Suggested Citation

Boyson, Nicole M. and Helwege, Jean and Jindra, Jan, Crises, Liquidity Shocks, and Fire Sales at Commercial Banks (January 30, 2014). Financial Management (Forthcoming). Available at SSRN: https://ssrn.com/abstract=2021386 or http://dx.doi.org/10.2139/ssrn.2021386

Nicole M. Boyson

Northeastern University - D’Amore-McKim School of Business ( email )

360 Huntington Ave.
Boston, MA 02115
617-373-4775 (Phone)

Jean Helwege

UC Riverside ( email )

900 University Ave
Riverside, CA 92521
United States

Jan Jindra (Contact Author)

U.S. Securities and Exchange Commission - Division of Economic and Risk Analysis ( email )

44 Montgomery Street
San Francisco, CA 94104
United States

Paper statistics

Downloads
306
Rank
81,818
Abstract Views
1,171