Regulating risky assets liquidity

Abstract

The existence of the risk of the securitized assets on the bank balance sheets was one of the specificities of the 2007–2009 crisis. Asset markets have frozen, in the wake of the confidence crisis, linked to the asymmetry of information between banks, sellers of these securitized assets and investment funds, their buyers. In this context, this paper proposes a sequential equilibrium in which the central bank can intervene to revive the asset market. However, this role of the central banker is that of a risk taker of last resort due to the fiscal cost. The paper then shows that the mission of supplying liquidity must be supplemented by a risk management policy of the central bank balance sheet, on the extreme risks of the assets. The risk management policy defines a macroprudential policy. A comparison is made between the normative model and the practical management of the crisis by the central banks.