Fear of fire sales and the credit freeze

  title={Fear of fire sales and the credit freeze},
  author={Douglas W. Diamond and Raghuram G. Rajan},
Is there any need to “clean” up a banking system in the midst of a crisis, by closing or recapitalizing weak banks and taking bad assets off bank balance sheets, or can one wait till the crisis is over? We argue that an “overhang” of impaired banks that may be forced to sell assets soon can reduce the current price of illiquid assets sufficiently that weak banks have no interest in selling them. Anticipating a potential future fire sale, cash rich buyers have high expected returns to holding… CONTINUE READING
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