Insecure debt

Rafael Matta and Enrico Perotti

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: We analyse bank runs under fundamental and asset liquidity risk, adopting a realistic description of bank default. We obtain an unique run equilibrium, even as fundamental risk becomes arbitrarily small. When safe returns are securitized and pledged to repo debt, funding costs are reduced but risk becomes concentrated on unsecured debt. We show the private choice of repo debt leads to more frequent unsecured debt runs. Thus satisfying safety demand via secured debt creates risk directly. Collateral fire sales upon default may reduce its liquidity and lead to higher haircuts, which further increase the frequency of runs.

Keywords: Repo credit; bank runs; asset liquidity risk (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2015-07-30
New Economics Papers: this item is included in nep-ban and nep-cfn
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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http://eprints.lse.ac.uk/65099/ Open access version. (application/pdf)

Related works:
Working Paper: Insecure Debt (2015)
Working Paper: Insecure Debt (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:65099

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