The Interaction of Bankers' Asset and Liability Management with Liquidity Concerns

65 Pages Posted: 15 Apr 2020 Last revised: 7 Jan 2021

Date Written: March 26, 2020

Abstract

This paper develops a dynamic general equilibrium model on the interaction of bankers' asset and liability management with liquidity concerns. Bankers screen real production projects and issue deposits. Liquidity concerns stem from endogenized early withdrawals of deposits. To fulfill early withdrawals, bankers sell assets in a secondary market. The paper argues that ex post asymmetric information in the secondary market distorts bankers' incentive in screening ex ante, as bad assets are easier to sell and generate liquidity benefits. Moreover, the general equilibrium feature of the model implies that exogenous aggregate productivity shocks are amplified and booms may lead to busts.

Keywords: adverse selection, liquidity, bank run, lending standard, amplification, boom-bust cycle

JEL Classification: D82, E32, E44, G01, G21

Suggested Citation

Fan, Yiran, The Interaction of Bankers' Asset and Liability Management with Liquidity Concerns (March 26, 2020). Available at SSRN: https://ssrn.com/abstract=3561614 or http://dx.doi.org/10.2139/ssrn.3561614

Yiran Fan (Contact Author)

University of Chicago ( email )

1101 East 58th Street
Chicago, IL 60637
United States

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