TY - JOUR AU - Acharya,Viral V. AU - Shin,Hyun Song AU - Yorulmazer,Tanju TI - Crisis Resolution and Bank Liquidity JF - National Bureau of Economic Research Working Paper Series VL - No. 15567 PY - 2009 Y2 - December 2009 UR - http://www.nber.org/papers/w15567 L1 - http://www.nber.org/papers/w15567.pdf N1 - Author contact info: Viral V. Acharya Stern School of Business New York University 44 West 4th Street, Suite 9-84 New York, NY 10012 Tel: 212/998-0354 Fax: 212 995 4233 E-Mail: vacharya@stern.nyu.edu Hyun Song Shin Department of Economics Princeton University Princeton, NJ 08544 Tel: 609/258-4467 Fax: 609/258-0771 E-Mail: hsshin@princeton.edu Tanju Yorulmazer Federal Reserve Bank of New York 33 Liberty Street New York, NY 10045 Tel: 212 720 6887 E-Mail: tanju.yorulmazer@ny.frb.org AB - What is the effect of financial crises and their resolution on banks’ choice of liquid asset holdings? When risky assets have limited pledgeability and banks have relative expertise in employing risky assets, the market for these assets clears only at fire-sale prices following a large number of bank failures. The gains from acquiring assets at fire-sale prices make it attractive for banks to hold liquid assets. We show that the resulting choice of bank liquidity is counter-cyclical, inefficiently low during economic booms but excessively high during crises, and present and discuss evidence consistent with these predictions. Since inefficient users may enter asset markets when prices fall sufficiently, interventions to resolve banking crises may be desirable ex post. However, policies aimed at resolving crises affect ex-ante bank liquidity in subtle ways: while liquidity support to failed banks or unconditional support to surviving banks in acquiring failed banks give banks incentives to hold less liquidity, support to surviving banks that is conditional on their liquid asset holdings creates incentives for banks to hold more liquidity. ER -