Managing Markets for Toxic Assets

Christopher House () and Yusufcan Masatlioglu

MPRA Paper from University Library of Munich, Germany

Abstract: We present a model in which banks trade toxic assets to fund investments. Adverse selection in toxic assets reduces liquidity and investment. Investment is inefficiently low because banks must sell high-quality assets below their "fair" value. We consider whether equity injections and asset purchases improve market outcomes. By allowing banks to fund investments without selling high-quality assets, equity injections reduce the number of high-quality assets traded and further contaminate the interbank market. If equity is directed to firms with the greatest liquidity needs, the contamination effect causes investment to fall. Asset purchase programs often improve liquidity, investment and welfare.

Keywords: Adverse selection; investment; TARP; financial crisis (search for similar items in EconPapers)
JEL-codes: D53 D82 E22 E44 E6 (search for similar items in EconPapers)
Date: 2010-06-22
New Economics Papers: this item is included in nep-ban and nep-cta
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Related works:
Journal Article: Managing markets for toxic assets (2015)
Working Paper: Managing Markets for Toxic Assets (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:24590

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