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Board of Governors of the Federal Reserve System (US)
Finance and Economics Discussion Series
Endogenous Debt Maturity and Rollover Risk
We challenge the common view that short-term debt, by having to be rolled over continuously, is a risk factor that exposes banks to higher default risk. First, we show that the average effect of expiring obligations on default risk is insignificant; it is only when a bank has limited access to new funds that maturing debt has a detrimental impact on default risk. Next, we show that both limited access to new funds and shorter maturities are causally determined by deteriorating market expectations about the bank's future profitability. In other words, short-term debt is not a cause of fragility but the result of creditors losing faith in the long-run prospects of the bank, hence forcing it to shorten its debt maturity. Finally, we build a model that endogenizes the debt maturity structure and predicts that worse market expectations lead to a maturity shortening.
Cite this item
Emanuele Brancati & Marco Macchiavelli, Endogenous Debt Maturity and Rollover Risk, Board of Governors of the Federal Reserve System (US), Finance and Economics Discussion Series 2016-074, 09 Sep 2016.
- G01 - Financial Economics - - General - - - Financial Crises
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
Keywords: Banks ; Debt issuance ; Financial crisis ; Maturity structure ; Rollover risk
This item with handle RePEc:fip:fedgfe:2016-74
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