Working Paper: CEPR ID: DP8476
Authors: Franklin Allen; Ana Babus; Elena Carletti
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: interim information; rollover risk; short-term debt
JEL Codes: D85; G01; G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| short-term debt (H63) | systemic risk (E44) |
| information contagion (D83) | systemic risk (E44) |
| clustered asset structures (C38) | systemic risk (E44) |
| asset structure (G32) | investor rollover decisions (G11) |
| investor rollover decisions (G11) | systemic risk (E44) |
| clustered structures (C38) | concentration of defaults (G33) |
| negative information (D80) | defaults in clustered structures (C38) |
| bad news (Y70) | rollover frequency in clustered structures (C69) |
| early liquidation of banks (G33) | systemic risk (E44) |
| clustered structures (C38) | welfare (I38) |