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Cover IMF Working Papers
How is the likelihood of fire sales in a crisis affected by the interaction of various bank regulations?
Author: Mr. Divya Kirtihttps://orcid.org/0000-0001-6636-6687 and Vijay Narasiman
Series:
IMF Working Papers
Volume/Issue:
Volume 2017: Issue 068
Language:
English
Publication Date:
24 Mar 2017
DOI:
https://doi.org/10.5089/9781475588675.001
ISBN:
9781475588675
ISSN:
1018-5941
Pages:
46
Keywords:
WP; diversified portfolio; capital ratio
Legal-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.
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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.
Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund
Volume 2017: Issue 068

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