The Impact of Ex Ante Regulations and Ex Post Interventions on Bank Lending and Solvency
Manuel Bachmann ()
Additional contact information
Manuel Bachmann: Department of Economics, Vienna University of Economics and Business
Department of Economics Working Papers from Vienna University of Economics and Business, Department of Economics
In this paper, I examine the impact of direct equity injections and troubled asset purchases on bank lending and solvency and analyze how ex ante tighter caps on leverage affect ex post decisions between both interventions. Extending the model of Bachmann (2018) by adding the government as a liquidity supplier, illiquid banks can either sell troubled assets at fire sale prices to collateralized financed liquid banks or to the government. If illiquid banks are forced to sell all troubled assets in order to meet premature withdrawals and the government is left with excess liquidity compared to direct equity injections, they can use these funds to bid up prices. Higher prices reduce future returns on buying illiquid assets and motivate liquid banks’ incentive to lend by crowding out their speculative motive for liquidity hoarding. As a result, troubled asset purchases weakly dominate direct equity injections in terms of lending and solvency, directly amplified by a drop in collateral liquidity. Additionally, regulating illiquid banks ex ante by tighter caps on leverage affects the government’s decisions about ex post interventions to effectively stabilize lending and solvency conditions, as the self-reinforcing downward spiral between fire sale prices and collateral liquidity is mitigated. Hence, I find that there exists an inherent nexus between ex ante regulations and ex post interventions.
Keywords: Fire Sales; Collateralized Financing; Troubled Asset Purchases; Capital Injections; Leverage Requirements; Lending; Solvency (search for similar items in EconPapers)
JEL-codes: G01 G12 G21 G28 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban
Note: PDF Document
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:wiw:wiwwuw:wuwp269
Access Statistics for this paper
More papers in Department of Economics Working Papers from Vienna University of Economics and Business, Department of Economics Welthandelsplatz 1, 1020 Vienna, Austria.
Bibliographic data for series maintained by Department of Economics ().