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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 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.

Suggested Citation

  • Asano, Koji, 2023. "Liquidity Policies with Opacity," MPRA Paper 119531, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:119531
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    References listed on IDEAS

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    1. Jonathan Chiu & Thorsten V. Koeppl, 2016. "Trading Dynamics with Adverse Selection and Search: Market Freeze, Intervention and Recovery," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 83(3), pages 969-1000.
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    5. Jonathan Chiu & Thorsten V. Koeppl, 2016. "Trading Dynamics with Adverse Selection and Search: Market Freeze, Intervention and Recovery," Review of Economic Studies, Oxford University Press, vol. 83(3), pages 969-1000.
    6. Jean Tirole, 2011. "Illiquidity and All Its Friends," Journal of Economic Literature, American Economic Association, vol. 49(2), pages 287-325, June.
    7. Asano, Koji, 2024. "Managing financial expertise," International Review of Economics & Finance, Elsevier, vol. 89(PA), pages 351-365.
    8. Chiu, Jonathan & Koeppl, Thorsten V, 2016. "Trading dynamics with adverse selection and search: Market freeze, intervention and recovery," Working Paper Series 19475, Victoria University of Wellington, School of Economics and Finance.
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    Full references (including those not matched with items on IDEAS)

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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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