Comparison of Bank Fire Sales to Forced House Sales

Financial System Contagion

A widespread shock to the financial system causes many banks to simultaneously need to raise cash. They all decide to sell large portions of their corporate bond holdings. Arrange the following events to illustrate the destructive feedback loop that can result from this situation.

Imagine a scenario where a large number of financial institutions hold substantial amounts of the same type of asset. A sudden, system-wide shock occurs, causing many of these institutions to simultaneously attempt to sell their holdings of this asset to raise cash. Which of the following outcomes best describes the resulting positive feedback loop?

The Destructive Cycle of Coordinated Asset Sales