Asset Commonality, Debt Maturity and Systemic Risk
Ana Babus () and
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Franklin Allen: University of PA
Elena Carletti: European University Institute
Working Papers from University of Pennsylvania, Wharton School, Weiss Center
We develop a model in which asset commonality and short-term debt of banks inter act 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.
JEL-codes: G01 G21 (search for similar items in EconPapers)
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Working Paper: Asset Commonality, Debt Maturity and Systemic Risk (2013)
Journal Article: Asset commonality, debt maturity and systemic risk (2012)
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:11-58
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