Financial Firm Bankruptcy and Systemic Risk

45 Pages Posted: 12 Dec 2008 Last revised: 31 Aug 2009

Multiple version iconThere are 2 versions of this paper

Date Written: 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.

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

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

Suggested Citation

Helwege, Jean, Financial Firm Bankruptcy and Systemic Risk (August 28, 2009). Available at SSRN: or

Jean Helwege (Contact Author)

UC Riverside ( email )

900 University Ave.
Anderson Hall
Riverside, CA 92521
United States
9518274284 (Phone)

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