We study liquidity transfers between banks through the interbank borrowing and asset sale markets when, (i) surplus banks providingliquidity have market power, ii) there are frictions in the lendingmarket due to moral hazard, and, (iii) assets are bank-specific. We show that when the outside...

We study the interbank lending and asset sales markets in which banks with surplus liquidity have market power, frictions arise in lending due to moral hazard, and assets are bank-specific. Illiquid banks have weak outside options that allow surplus banks to ration lending, resulting in...

We present a model of banks' liquidity management where banks choose a portfolio of liquid and illiquid assets, and later on decide to lend or hoard liquidity. Ex ante, banks choose whether to be "liquid", by holding both liquid and illiquid assets, or "illiquid", by holding only illiquid...