Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/179509
Authors: 
König, Philipp J.
Pothier, David
Year of Publication: 
2018
Series/Report no.: 
Bundesbank Discussion Paper 15/2018
Abstract: 
This paper proposes a theory of shadow bank runs in the presence of sponsor liquidity support. We show that liquidity lines designed to insulate shadow banks from market and funding liquidity risk can be destabilizing, as they provide them with incentives to acquire private information about their assets' type. This can lead to inefficient market liquidity dry-ups caused by self-fulfilling fears of adverse selection. By lowering asset prices, information acquisition also reduces shadow banks' equity value and may spur inefficient investor runs. We compare different policies that can be used to boost market and funding liquidity. While debt purchases prevent inefficient dry-ups, liquidity injections may backfire by exacerbating adverse selection frictions.
Subjects: 
Information Acquisition
Adverse Selection
Bank Runs
Global Games
JEL: 
D82
G01
G20
ISBN: 
978-3-95729-457-9
Document Type: 
Working Paper
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