Working Paper: NBER ID: w16607
Authors: Markus K. Brunnermeier; Martin Oehmke
Abstract: We develop a model of endogenous maturity structure for financial institutions that borrow from multiple creditors. We show that a maturity rat race can occur: an individual creditor can have an incentive to shorten the maturity of his own loan to the institution, allowing him to adjust his financing terms or pull out before other creditors can. This, in turn, causes all other lenders to shorten their maturity as well, leading to excessively short-term financing. This rat race occurs when interim information is mostly about the probability of default rather than the recovery in default, and is most pronounced during volatile periods and crises. Overall, firms are exposed to unnecessary rollover risk.
Keywords: maturity structure; financial institutions; rollover risk; short-term financing
JEL Codes: G21; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Inability to commit to an aggregate maturity structure (G32) | maturity rat race (J26) |
| maturity rat race (J26) | excessively short-term financing (G32) |
| interim information about default probability (G33) | maturity rat race (J26) |
| expectation of default-relevant information (D84) | creditors shorten maturities (G32) |
| creditors shorten maturities (G32) | unnecessary rollover risk for firms (G32) |
| volatile periods and crises (E32) | expectation of default-relevant information (D84) |