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Crises, Liquidity Shocks, and Fire Sales at Commercial Banks
Author(s) -
Boyson Nicole,
Helwege Jean,
Jindra Jan
Publication year - 2014
Publication title -
financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.647
H-Index - 68
eISSN - 1755-053X
pISSN - 0046-3892
DOI - 10.1111/fima.12056
Subject(s) - market liquidity , solvency , business , financial system , liquidity crisis , finance , financial crisis , economic shortage , equity (law) , order (exchange) , government (linguistics) , economics , linguistics , philosophy , political science , law , macroeconomics
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.