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Financial Firm Bankruptcy and Systemic Risk

Jean Helwege
Pennsylvania State University


August 28, 2009


Abstract:     
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.

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

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

Working Paper Series

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


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Contact Information

Jean Helwege (Contact Author)
Pennsylvania State University ( email )
318 Business Building
University Park, PA 16802
United States
814-863-0446 (Phone)
814-865-3362 (Fax)
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