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How Does Market Power Affect Fire-Sale Externalities?

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Abstract

An important role of capital and liquidity regulations for financial institutions is to counteract inefficiencies associated with “fire-sale externalities,” such as the tendency of institutions to lever up and hold illiquid assets to the extent that their collective actions increase financial vulnerabilities. However, theoretical models that study such externalities commonly assume perfect competition among financial institutions, in spite of high (and increasing) financial sector concentration. In this post, which is based on our forthcoming article, we consider instead how the effects of fire-sale externalities change when financial institutions have market power.

Suggested Citation

  • Thomas M. Eisenbach & Gregory Phelan, 2021. "How Does Market Power Affect Fire-Sale Externalities?," Liberty Street Economics 20211110, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednls:93336
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    More about this item

    Keywords

    financial institutions; fire sale; concentration; market power;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services
    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment

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