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NATIONAL BUREAU OF ECONOMIC RESEARCH

NBER Publications by Bruce Tuckman

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December 2013Unintended Consequences of LOLR Facilities: The Case of Illiquid Leverage
with Viral V. Acharya: w19773
While the direct effect of lender-of-last-resort (LOLR) facilities is to forestall the default of financial firms that lose funding liquidity, an indirect effect is to allow these firms to minimize deleveraging sales of illiquid assets. This unintended consequence of LOLR facilities manifests itself as excess illiquid leverage in the financial sector, can make future liquidity shortfalls more likely, and can lead to an increase in default risks. Furthermore, this increase in default risk can occur despite the fact that the combination of LOLR facilities and reduced asset sales raises the prices of illiquid assets. The behavior of U.S. broker-dealers during the crisis of 2007-2009 is consistent with the unintended consequence just described. In particular, given the Federal Reserve's LOLR...

Contact and additional information for this authorAll NBER papers and publicationsNBER Working Papers only

 
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