Endogenous Debt Maturity and Rollover Risk

Emanuele Brancati and Marco Macchiavelli

No 2016-074, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We challenge the common view that short-term debt, by having to be rolled over continuously, is a risk factor that exposes banks to higher default risk. First, we show that the average effect of expiring obligations on default risk is insignificant; it is only when a bank has limited access to new funds that maturing debt has a detrimental impact on default risk. Next, we show that both limited access to new funds and shorter maturities are causally determined by deteriorating market expectations about the bank's future profitability. In other words, short-term debt is not a cause of fragility but the result of creditors losing faith in the long-run prospects of the bank, hence forcing it to shorten its debt maturity. Finally, we build a model that endogenizes the debt maturity structure and predicts that worse market expectations lead to a maturity shortening.

Keywords: Banks; debt issuances; Financial crisis; Maturity structure; Rollover risk (search for similar items in EconPapers)
JEL-codes: G01 G21 G32 (search for similar items in EconPapers)
Pages: 53 pages
Date: 2016-09-09
New Economics Papers: this item is included in nep-ban, nep-cfn and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Journal Article: Endogenous debt maturity and rollover risk (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2016-74

DOI: 10.17016/FEDS.2016.074

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