How is the likelihood of fire sales in a crisis affected by the interaction of various bank regulations?
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Summary:
We present a model that describes how different types of bank regulation can interact to affect the likelihood of fire sales in a crisis. In our model, risk shifting motives drive how banks recapitalize following a negative shock, leading banks to concentrate their portfolios. Regulation affects the likelihood of fire sales by giving banks the incentive to sell certain assets and retain others. Ex-post incentives from high risk weights and the interaction of capital and liquidity requirements can make fire sales more likely. Time-varying risk weights may be an effective tool to prevent fire sales.
Series:
Working Paper No. 2017/068
Subject:
Asset liquidity Asset management Banking Liquidity requirements Stocks
English
Publication Date:
March 24, 2017
ISBN/ISSN:
9781475588675/1018-5941
Stock No:
WPIEA2017068
Pages:
46
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