Crises, Liquidity Shocks, and Fire Sales at Commercial Banks

If liquidity shortages cause financial crises, a lender of last resort can provide funds to banks facing potential fire sales. However, if funding problems primarily occur at banks with existing solvency problems, then government liquidity programs may not spur bank lending. We find that commercial...

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Bibliographic Details
Published in:Financial management 2014-12, Vol.43 (4), p.857-884
Main Authors: Boyson, Nicole, Helwege, Jean, Jindra, Jan
Format: Article
Language:English
Subjects:
Analysis
Assets
Bank assets
Bank capital
Bank liquidity
Bank loans
Bank markets
Banking crises
Capital
Commercial banks
Debt
Economic aspects
Economic crisis
Equity
Financial crisis
Funding
Liquidity
Liquidity (Finance)
Short term debt
Studies
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Summary:If liquidity shortages cause financial crises, a lender of last resort can provide funds to banks facing potential fire sales. However, if funding problems primarily occur at banks with existing solvency problems, then government liquidity programs may not spur bank lending. We find that commercial bank funding does not typically dry up in a crisis, not even during the subprime crisis. Rather, weak banks are more likely to borrow less. Furthermore, banks rely more on deposits and newly issued equity than fire sales. When they do sell assets, they cherry pick assets in order to alleviate pressure from capital regulations.
ISSN:0046-3892
1755-053X
DOI:10.1111/fima.12056