Asset Commonality, Debt Maturity and Systemic Risk

Franklin Allen, Elena Carletti () and Ana Babus

No 8476, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We develop a model in which asset commonality and short-term debt of banks interact to generate excessive systemic risk. Banks swap assets to diversify their individual risk. Two asset structures arise. In a clustered structure, groups of banks hold common asset portfolios and default together. In an unclustered structure, defaults are more dispersed. Portfolio quality of individual banks is opaque but can be inferred by creditors from aggregate signals about bank solvency. When bank debt is short-term, creditors do not roll over in response to adverse signals and all banks are inefficiently liquidated. This information contagion is more likely under clustered asset structures. In contrast, when bank debt is long-term, welfare is the same under both asset structures.

Keywords: Interim information; Rollover risk.; Short-term debt (search for similar items in EconPapers)
JEL-codes: D85 G01 G21 (search for similar items in EconPapers)
Date: 2011-07
New Economics Papers: this item is included in nep-ban, nep-bec, nep-cba and nep-cta
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (22)

Downloads: (external link)
https://cepr.org/publications/DP8476 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Working Paper: Asset Commonality, Debt Maturity and Systemic Risk (2013)
Journal Article: Asset commonality, debt maturity and systemic risk (2012)
Working Paper: Asset Commonality, Debt Maturity and Systemic Risk (2011)
Chapter: Asset Commonality, Debt Maturity, and Systemic Risk (2010)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:8476

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP8476

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().