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Wholesale Funding, Coordination, and Credit Risk

Lei Zhang, Lin Zhang and Yong Zheng
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Lei Zhang: University of Warwick
Yong Zheng: Southwestern University of Finance and Economics

CAGE Online Working Paper Series from Competitive Advantage in the Global Economy (CAGE)

Abstract: We use the global games approach to study key factors a?ecting the credit risk associated with roll-over of bank debt. When creditors are heterogenous, these include the extent of short-term borrowing and capital market liquidity for repo ?nancing. Speci?cally, in a model with a large institutional creditor and a continuum of small creditors independently making their roll-over decisions based on private information, we ?nd that increasing the proportion of short-term debt and/or decreasing market liquidity reduces the willingness of creditors to roll over. This raises credit risk in equilibrium. The presence of a large creditor does not always reduce credit risk, however, unless it is better informed.

Keywords: Credit Risk; Coordination; Debt Crisis; Private information; Global games (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-ban, nep-cfn, nep-cta and nep-rmg
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