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Discussion Paper Details

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Title: Insecure Debt

Author(s): Rafael Matta and Enrico C Perotti

Publication Date: March 2015

Keyword(s): bank runs, haircuts, repo and secured credit

Programme Area(s): Financial Economics

Abstract: We study bank funding choices under asset liquidity risk and a realistic bankruptcy process, where illiquid assets are shared among all unpaid creditors. Repo debt is cheap and stable but shifts risk to unsecured debt. In the unique equilibrium, repo has a nonmonotonic effect. Runs are rare when unpledged liquid assets are abundant, rise as more repo funding shifts risk, and ultimately fall as less liquidity is available for early withdrawals. The socially optimal choice minimizes inefficient runs by limiting repo or by subsidizing a high rollover yield on unsecured debt. The private choice uses more repo and a lower rollover reward, trading off runs against cheaper funding

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=10505

Bibliographic Reference

Matta, R and Perotti, E. 2015. 'Insecure Debt'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=10505