Moral hazard and debt maturity

Gur Huberman and Rafael Repullo

Journal of Financial Intermediation, 2025, vol. 61, issue C

Abstract: We present a model of the maturity of a bank’s uninsured debt. The bank borrows to invest in a long-term asset with endogenous and nonverifiable risk. This moral hazard problem leads to excessive risk-taking. Short-term debt may have a disciplining effect on risk-taking, but it may lead to overborrowing and/or inefficient liquidation. We characterize the conditions under which short- and long-term debt are feasible, and show circumstances where only short-term debt is feasible and where short-term debt dominates long-term debt when both are feasible. The results are consistent with some features of the period preceding the 2007-2009 global financial crisis.

Keywords: Short-term debt; Long-term debt; Optimal financial contracts; Risk-shifting; Rollover risk; Overborrowing; Inefficient liquidation (search for similar items in EconPapers)
JEL-codes: G21 G32 (search for similar items in EconPapers)
Date: 2025
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Related works:
Working Paper: Moral Hazard and Debt Maturity (2014)
Working Paper: Moral hazard and debt maturity (2014)
Working Paper: Moral Hazard and Debt Maturity (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinin:v:61:y:2025:i:c:s1042957324000494

DOI: 10.1016/j.jfi.2024.101121

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