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Financial Firm Bankruptcy and Systemic Risk

Jean Helwege

University of South Carolina

August 28, 2009

Financial firm distress often leads to regulatory intervention, such as “too big to fail” (TBTF) policies. Two oft-cited channels to justify TBTF are domino effects (counterparty risk) and the effects of fire sales. We analyze the policy responses for avoiding systemic risk while considering the role of these two factors. Prior bankruptcies suggest that cascades caused by counterparty risk do not occur, as firms diversify their exposures. Instead, crises tend to be symptomatic of common factors in financial firms’ portfolios, which lead to widespread instances of declining asset values and which are often misinterpreted as resulting from fire sales.

Number of Pages in PDF File: 45

Keywords: Financial institutions, systemic risk, Too big to fail, fire sales, counterparty risk

JEL Classification: G28, G33, E44, E58, E61

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Date posted: December 12, 2008 ; Last revised: August 31, 2009

Suggested Citation

Helwege, Jean, Financial Firm Bankruptcy and Systemic Risk (August 28, 2009). Available at SSRN: http://ssrn.com/abstract=1315316 or http://dx.doi.org/10.2139/ssrn.1315316

Contact Information

Jean Helwege (Contact Author)
University of South Carolina ( email )
Columbia, SC 29208
United States
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