Asset Commonality, Debt Maturity and Systemic Risk

Franklin Allen, Ana Babus and Elena Carletti ()

Working Papers from University of Pennsylvania, Wharton School, Weiss Center

Abstract: We develop a model where financial institutions swap projects in order to diversify their individual risk. This can lead to two different asset structures. In a clustered structure groups of financial institutions hold identical portfolios and default together. In an unclustered structure defaults are more dispersed. With long term finance welfare is the same in both structures. In contrast, when short term finance is used, the network structure matters. Upon the arrival of a signal about banks' future defaults, investors update their expectations of bank solvency. If their expectations are low, they do not roll over the debt and all institutions are early liquidated. We compare investors' rollover decisions and welfare in the two asset structures.

JEL-codes: D85 G01 G21 (search for similar items in EconPapers)
Date: 2013-02
New Economics Papers: this item is included in nep-ban, nep-cfn and nep-ppm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Asset commonality, debt maturity and systemic risk (2012)
Working Paper: Asset Commonality, Debt Maturity and Systemic Risk (2011)
Working Paper: Asset Commonality, Debt Maturity and Systemic Risk (2011)
Chapter: Asset Commonality, Debt Maturity, and Systemic Risk (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:ecl:upafin:10-30

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