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  • March 2015
  • Article
  • Journal of Financial Economics

Vulnerable Banks

By: Robin Greenwood, Augustin Landier and David Thesmar
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Abstract

We present a model in which fire sales propagate shocks across bank balance sheets. When a bank experiences a negative shock to its equity, a natural way to return to target leverage is to sell assets. If potential buyers are limited, then asset sales depress prices, in which case one bank's sales impact other banks with common exposures. We show how this contagion effect adds up across the banking sector, and how it can be estimated empirically using balance sheet data. We compute bank exposures to system-wide deleveraging, as well as the spillovers induced by individual banks. Applying the model to European banks, we evaluate a variety of interventions to reduce their vulnerability to fire sales during the sovereign debt crisis.

Keywords

Financial Liquidity; Financial Crisis; Banks and Banking; Banking Industry; Europe

Citation

Greenwood, Robin, Augustin Landier, and David Thesmar. "Vulnerable Banks." Journal of Financial Economics 115, no. 3 (March 2015): 471–485.
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About The Author

Robin Greenwood

Finance
→More Publications

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