Asset commonality, debt maturity and systemic risk

Franklin Allen, Ana Babus and Elena Carletti ()

Journal of Financial Economics, 2012, vol. 104, issue 3, 519-534

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: Contagion; Clustered and unclustered networks Interim information (search for similar items in EconPapers)
JEL-codes: G01 G21 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (221)

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Related works:
Working Paper: Asset Commonality, Debt Maturity and Systemic Risk (2013)
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:eee:jfinec:v:104:y:2012:i:3:p:519-534

DOI: 10.1016/j.jfineco.2011.07.003

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