cash-in-the-market pricing fin.

[valida]

When the bubble bursts, either because returns are low or because the central bank tightens credit, banks are put under severe strain. Many of their liabilities are fixed while their assets fall in value. Depositors and other claimants may decide to withdraw their funds in anticipation of problems to come. This will force banks to liquidate some of their assets,
which may result in a further fall in asset bubbles because of a lack of liquidity in the market. It can be shown that when there is a market for risky assets, their price is determined by “cash-in-the-market pricing” in some states and can fall below their fundamental value. This leads to an inefficient allocation of resources. The central bank can eliminate this inefficiency by an appropriate injection of liquidity into the market.