Liquidity policies with opacity

Koji Asano

The Quarterly Review of Economics and Finance, 2024, vol. 97, issue C

Abstract: We examine liquidity policies in an environment in which banks can cover their liquidity needs by hoarding liquidity or selling long-term assets to expert investors. Investors 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: 2024
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Working Paper: Liquidity Policies with Opacity (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:quaeco:v:97:y:2024:i:c:s1062976924000917

DOI: 10.1016/j.qref.2024.101885

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