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Liquidity policies with opacity

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  • Asano, Koji

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.

Suggested Citation

  • Asano, Koji, 2024. "Liquidity policies with opacity," The Quarterly Review of Economics and Finance, Elsevier, vol. 97(C).
    • Handle: RePEc:eee:quaeco:v:97:y:2024:i:c:s1062976924000917
    DOI: 10.1016/j.qref.2024.101885
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    More about this item

    Keywords

    Liquidity; Information acquisition; Financial crisis; Liquidity regulation;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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