Professor Viral Acharya on Fire-Sale Risk in Financial Markets

The following is an excerpt from Bloomberg Businessweek:

Viral Acharya, NYU SternWall Street’s biggest firms are close to agreeing on a plan that would safeguard the financial markets from the crippling fire sales that engulfed Lehman Brothers Holdings Inc. and Bear Stearns Cos.

By doing so, the participants seek to reach a solution to what the Federal Reserve sees as the last systemic risk in the $1.6 trillion-a-day market for short-term funding yet to be addressed: the potential for questions over a bond dealer’s liquidity to unleash a wholesale dumping of assets that causes a crisis of confidence in the financial system.

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“The Fed is right to worry about fire-sale risk,” Viral Acharya, a finance professor who focuses on liquidity risk and regulation at New York University’s Stern School of Business, said in a telephone interview on Feb. 25. Lehman and Bear Stearns showed the consequences when “creditors in the repo market started worrying about these counterparties.”

Read the entire Bloomberg Businessweek article here.

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