Quarterly Journal of Economics Vol. 126 No. 2 2011
Fear of Fire Sales, Illiquidity Seeking, and Credit Freezes *
Abstract
Is there any need to clean up a banking system by closing some banks and forcing others to sell assets if the risk of a crisis becomes high? Impaired banks that may be forced to sell illiquid assets in the future have private incentives to hold, rather than sell, those assets Anticipating a potential fire sale, liquid buyers expect high returns, reducing their incentive to lend. Privately optimal trading decisions therefore lead to a worse fire sale and a larger drop in lending than is necessary. We discuss alternative ways of cleaning up the system and the associated costs and benefits.
- DOI
- 10.1093/qje/qjr012
- Volume
- 126
- Issue
- 2
- Pages
- 557-591
- Language
- en
- Sources
- bibtex:phds-export.bib crossref openalex