David Pothier (Universität Wien) – Safe but fragile: information acquisition, sponsor support and shadow bank runs

This paper proposes a theory of (shadow) bank runs based on banks' ability to acquire private information about their assets. We show that private liquidity lines designed to mitigate roll-over risk can be destabilizing by incentivizing banks to acquire private information about their assets. This can lead to market liquidity dry-ups spurred by self-fulfilling fears of adverse selection. By lowering asset prices, information acquisition also decreases banks' equity value, amplifying funding withdrawals. We compare different policies that can be used to boost market and funding liquidity. While debt purchases prevent inefficient dry-ups, liquidity injections may backfire by exacerbating adverse selection.

Friday, April 12, 2019, 11:00 a.m.

Oesterreichische Nationalbank
Otto-Wagner-Platz 3, 1090 Vienna
Veranstaltungssaal, Ground floor

Please registrate until Tuesday, April 9, 2019.