Liquidity management, fire sales and liquidity crises in banking
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Liquidity management, fire sales and liquidity crises in banking
Liquidity Management, Fire Sales and Liquidity Crises in Banking: the Role of Leverage*Fabiana Gomez? Quynh-Anh V(?March 29. 2019AbstractThis paper pr Liquidity management, fire sales and liquidity crises in banking roposes a positive theory of the links between banks’ capitalisation and their liquidity risk taking, the extent of fire-sale problems, and the severity of liquidity crises. In a basic framework with a single bank, we find that banks’ incentives to hold liquidity for precautionary reasons are increa Liquidity management, fire sales and liquidity crises in banking sing with their capital. In a continuum-of-banks setting in which both precautionary and speculative motives of liquidity holdings are taken into accoLiquidity management, fire sales and liquidity crises in banking
unt, we find that while the fire-sale discount is decreasing with the capitalisation of the hanking system, the link between the latter and the severiLiquidity Management, Fire Sales and Liquidity Crises in Banking: the Role of Leverage*Fabiana Gomez? Quynh-Anh V(?March 29. 2019AbstractThis paper pr Liquidity management, fire sales and liquidity crises in banking ve Liquidity Holdings, and Cash-In-The-Market Pricing.* Corresponding author Quynh-Anh Vo at the Bank of England. A previous version was circulated under the title: "Liquidity Management in Banking: What is the Bole of Leverage?" We are grateful to Toni Ahnert (discussant), Urs Birchler, Gianni De N Liquidity management, fire sales and liquidity crises in banking icolo, Hans Gorsbach, Michel Habib. Frederic Malherbe. Ettore Panetti (discussant). Bruno Parigi, Sebastian Pfeil ami .Jean-Charles Rochet for their hLiquidity management, fire sales and liquidity crises in banking
elpful comments and suggestions. We also thank seminar and conference participants at the University of Zurich, 2015 Paris Financial Management ConferLiquidity Management, Fire Sales and Liquidity Crises in Banking: the Role of Leverage*Fabiana Gomez? Quynh-Anh V(?March 29. 2019AbstractThis paper pr Liquidity management, fire sales and liquidity crises in banking h Cluster 3 on financial stability, macroprudential regulation and micropmdcntial supervision, 2018 IBEFA Summer conference, ESEM 2018 and 1WFSAS 2018 for their useful feedback. A significant part of this research was done when the second author was affiliated with the University of Zurich and recei Liquidity management, fire sales and liquidity crises in banking ved funding from the ERC (the grant agreement 249115-R MAC), from NCCR FinRisk (project "Banking and Regulation") and from Swiss Finance Institute (prLiquidity management, fire sales and liquidity crises in banking
oject "Systemic Risk and Dynamic Contract Theory"). The views expresses! in this pajrer are those of the authors, and not necessarily those of the BanLiquidity Management, Fire Sales and Liquidity Crises in Banking: the Role of Leverage*Fabiana Gomez? Quynh-Anh V(?March 29. 2019AbstractThis paper pr Liquidity management, fire sales and liquidity crises in banking mail:quynh-anh.vo@bankofengland.co.uk.•py available at: https://ssrn.coíTưabstract=2696l261 IntroductionIn the aftermath of I he global financial crisis, two new liquidity standards, namely the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR), were introduced by the Basel Commi Liquidity management, fire sales and liquidity crises in banking ttee. Their main objectives encompass creating incentives for banks to belter manage their liquidity risk and improving the banking sector’s ability tLiquidity management, fire sales and liquidity crises in banking
o absorb liquidity shocks. These new policy measures raise a number of questions. including the potential substitutability and complementarity betweenLiquidity Management, Fire Sales and Liquidity Crises in Banking: the Role of Leverage*Fabiana Gomez? Quynh-Anh V(?March 29. 2019AbstractThis paper pr Liquidity management, fire sales and liquidity crises in banking effects of banks’ leverage on their incentives with respect to liquidity risk management. Precisely, this paper exploit's the following questions: Do better capitalised banks have better incentives to manage their liquidity risk? \re better capitalised banking systems more or less vulnerable to liq Liquidity management, fire sales and liquidity crises in banking uidity crises? How does the leverage distribution of the banking system affect the extent of the fire-sale problem? It thus proposes a positive theoryLiquidity management, fire sales and liquidity crises in banking
of the link between banks’ capitalisation and liquidity risk taking, as well as the severity of the fire-sale problem and liquidity crises.We developLiquidity Management, Fire Sales and Liquidity Crises in Banking: the Role of Leverage*Fabiana Gomez? Quynh-Anh V(?March 29. 2019AbstractThis paper pr Liquidity management, fire sales and liquidity crises in banking ks. So far. in the literature on bank liquidity, the liquidity shocks are usually modelled a la Diamond - Dybvig. In this way, banks are assumed to be financed by retail demandable deposits and thus, may be hit by a liquidity shock if a high number of their depositors come to withdraw. This withdraw Liquidity management, fire sales and liquidity crises in banking al is, ill turn, modelled as being determined either by rhe time preferences of risk-averse depositors or by the coordination problem between them eacLiquidity management, fire sales and liquidity crises in banking
h receiving some private signal about the quality of the banks' assets. In this paper, inspired by several observations from the 2007 - 2009 crisis, wLiquidity Management, Fire Sales and Liquidity Crises in Banking: the Role of Leverage*Fabiana Gomez? Quynh-Anh V(?March 29. 2019AbstractThis paper pr Liquidity management, fire sales and liquidity crises in banking (instead of being retail deposits), such as unsecured commercial papers. 1'hese types of debt were at the centre of the recent global financial crisis. Since unsecured wholesale debts are usually hold by sophisticated investors, such as financial institutions or money2Electronic copy available at: h Liquidity management, fire sales and liquidity crises in banking ttjmarket funds, we assume that the banks’ short-term debtholders are risk-neutral, and that the debt repayment is endogenously determined, dependingLiquidity management, fire sales and liquidity crises in banking
on the banks’ choice of assets. This endogeneity is a key difference between our paper and other papers that model retail deposits and assume an exogeLiquidity Management, Fire Sales and Liquidity Crises in Banking: the Role of Leverage*Fabiana Gomez? Quynh-Anh V(?March 29. 2019AbstractThis paper pr Liquidity management, fire sales and liquidity crises in banking ew information negatively affects banks’ funding liquidity, and thus, makes it difficult for banks Io meet their repayment obligations. This is analogous to the unfolding events of the recent crisis, according to which rhe triggering of the liquidity problem involved some public information regardin Liquidity management, fire sales and liquidity crises in banking g an increase in subprime mortgage defaults. What was followed was a deterioration of the short-term funding market, such as the commercial paper markLiquidity management, fire sales and liquidity crises in banking
et.Hence, the context we have in mind is one of banks that are financed by equity and wholesale unsecured short-term debt that matures after one perioLiquidity Management, Fire Sales and Liquidity Crises in Banking: the Role of Leverage*Fabiana Gomez? Quynh-Anh V(?March 29. 2019AbstractThis paper pr Liquidity management, fire sales and liquidity crises in banking more profitable than the former, but takes two periods to yield a cash How. This maturity mismatch between the payoff of the long-term assets and debt repayments gives rise to a need for banks to arrange for some liquidity at the interim date when their short-term debt repayments are due. We assume Liquidity management, fire sales and liquidity crises in banking that banks could raise liquidity at the interim date by pledging future cash flows of their long-term assets - funding liquidity. However, the banks'Liquidity management, fire sales and liquidity crises in banking
capacity to generate liquidity in this way may be restricted if bad news on the quality of the long-term assets is revealed at the repayment date. ThLiquidity Management, Fire Sales and Liquidity Crises in Banking: the Role of Leverage*Fabiana Gomez? Quynh-Anh V(?March 29. 2019AbstractThis paper pr Liquidity management, fire sales and liquidity crises in banking o insure themselves against liquidity shocks.We start with an examination of banks’ incentives to hold liquid assets to protect themselves against future liquidity shocks, i.e., incentives for precautionary liquidity holdings. and how these incent ives are affected by banks' leverage. This is done w Liquidity management, fire sales and liquidity crises in banking ithin a simple framework of an individual banks’ decisions. Then, in order to analyse the links between the capitalisation of the banking system and bLiquidity management, fire sales and liquidity crises in banking
oth the extent of the fire-sail* problem, and the severity of liquidity crises, we cast this building block of individual banks' decisions into a contLiquidity Management, Fire Sales and Liquidity Crises in Banking: the Role of Leverage*Fabiana Gomez? Quynh-Anh V(?March 29. 2019AbstractThis paper pr Liquidity management, fire sales and liquidity crises in banking secondary market for long-term assets. Therefore, banks with a liquidity shortage could sell their long-term assets in order to raise liquidity. This additional element serves two purposes. It first allows US to capture another source of liquidity that banks can rely on, namely market liquidity. It Liquidity management, fire sales and liquidity crises in banking also enables US to take into consideration another motive driving banks’ choice of ex-ante liquidity holdings, in addition to the precautionary motivLiquidity management, fire sales and liquidity crises in banking
e. Thai is the ''strategic" motive of being able to take advantage of fire sales -the so-called speculative motive of liquidity holdings.In our continLiquidity Management, Fire Sales and Liquidity Crises in Banking: the Role of Leverage*Fabiana Gomez? Quynh-Anh V(?March 29. 2019AbstractThis paper pr Liquidity management, fire sales and liquidity crises in banking be acquired by banks that survive liquidity shocks and have spare liquidity. Therefore, the price of the long-term assets, which is determined by the market-clearing condition, is of the "cash-in-the-market" type proposed by Allen and Gall! (1994). Moreover, we assume that the returns of the long-te Liquidity management, fire sales and liquidity crises in banking rm assets are perfectly correlated across banks. Hence, the new information will touch on the assets of all banks simultaneously, which means that theLiquidity management, fire sales and liquidity crises in banking
liquidity shock in our setup takes the form of systemic shock.Our contribution is twofold. First, we highlight a new channel that links banks' capitaGọi ngay
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