How is the likelihood of fire sales in a crisis affected by the interaction of various bank regulations?

March 24, 2017

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Format: Chicago

Divya Kirti, and Vijay Narasiman. How is the likelihood of fire sales in a crisis affected by the interaction of various bank regulations?, (USA: International Monetary Fund, 2017) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

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.

Subject: Asset liquidity, Asset management, Banking, Liquidity requirements, Stocks

Keywords: Capital ratio, Diversified portfolio, WP

Publication Details

Pages:

46
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2017/068
Stock No:

WPIEA2017068
ISBN:

9781475588675
ISSN:

1018-5941

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