Liquidity Policies with Opacity

Koji Asano

MPRA Paper from University Library of Munich, Germany

Abstract: We examine liquidity policies in an environment in which banks can cover liquidity needs by hoarding liquidity or selling legacy assets to expert investors. They can acquire costly information regarding asset quality and deprive banks with bad assets from accessing the asset market. To prevent expert scrutiny, banks must accept fire sale prices for their assets. These depressed prices induce banks to hoard inefficiently low (high) amounts of liquidity when the likelihood of a liquidity shock is relatively low (high). We show that policy interventions aimed at maintaining opacity in the asset market encourage (discourage) liquidity hoarding when there is underhoarding (overhoarding) of liquidity. This suggests that ex-post interventions can serve as substitutes for ex-ante liquidity regulations.

Keywords: liquidity; information acquisition; financial crisis; liquidity regulation (search for similar items in EconPapers)
JEL-codes: D82 G01 G21 (search for similar items in EconPapers)
Date: 2023-12-20
New Economics Papers: this item is included in nep-ban and nep-fdg
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Journal Article: Liquidity policies with opacity (2024)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:119531

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