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.
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|Size: ||1.4 MB|
|Publisher: ||INTERNATIONAL MONETARY FUND|
|Date published: || 2017|
|ISBN: ||9781475588972 (DRM-EPUB)|
|Read Aloud: ||not allowed|