Abstract

https://ssrn.com/abstract=2356224
 
 

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Financing Capacity and Fire Sales: Evidence from Bank Failures


Raghuram G. Rajan


University of Chicago - Booth School of Business; International Monetary Fund (IMF); National Bureau of Economic Research (NBER)

Rodney Ramcharan


University of Southern California, Price School of Public Policy

November 18, 2013


Abstract:     
Theory suggests the reduction in financing capacity after the failure of a financial intermediary can reduce the value of financial assets. Forced sales of the intermediary’s assets could consume liquidity, depressing the liquidation value of the assets of healthy intermediaries and causing contagious runs. This paper investigates these predictions using a new dataset of bank failures during the farm depression just before the Great Depression. Using regulatory impediments to lending across state borders as a means of identification, we find that the reduction in local financing capacity as a result of bank failures reduces the recovery rates on failed assets of nearby banks, depresses local land prices, renders land markets illiquid, and is associated with subsequent financial sector distress among nearby banks. All this indicates a rationale for why bank failures are contagious.

Number of Pages in PDF File: 44


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Date posted: November 19, 2013  

Suggested Citation

Rajan, Raghuram G. and Ramcharan, Rodney, Financing Capacity and Fire Sales: Evidence from Bank Failures (November 18, 2013). Available at SSRN: https://ssrn.com/abstract=2356224 or http://dx.doi.org/10.2139/ssrn.2356224

Contact Information

Raghuram G. Rajan
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-4437 (Phone)
773-702-0458 (Fax)

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International Monetary Fund (IMF) ( email )
700 19th Street NW
Washington, DC 20431
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
773-702-9299 (Phone)
773-702-0458 (Fax)
Rodney Ramcharan (Contact Author)
University of Southern California, Price School of Public Policy ( email )
Los Angeles, CA 90089
United States
HOME PAGE: http://https://sites.google.com/site/rodneyramcharan/
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