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Diane Publishing Books
Financial Fire Sales: Evidence from Bank Failures
Raghurm Rajan (au); Rodney Ramcharan (au)
Theory suggests the reduction in financing capacity after the failure of a financial intermediary can reduce the value of financial assets. Forced sales of the intermediary's assets could consume liquidity, depressing the liquidation value of the assets of healthy intermediaries and causing contagious runs. These financial fire sales can both cause, and exacerbate, real fire sales, the focus of previous studies. This study investigates the relevance of financial fire sales using new datasets covering bank failures during the farm depression in the U.S. just before the Great Depression, as well as bank failures during the Great Depression. The authors find that the reduction in local financing capacity as a result of bank failures reduces the recovery rates on failed assets of nearby banks, depresses local land prices, renders land markets illiquid, and is associated with subsequent distress in nearby banks. All this indicates a rationale for why bank failures are contagious. Tables and figures. This is a print on demand report.
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