Asset Commonality, Debt Maturity and Systemic Risk

50 Pages Posted: 5 Nov 2011

See all articles by Franklin Allen

Franklin Allen

Imperial College London

Ana Babus

Federal Reserve Bank of Chicago; Imperial College London

Elena Carletti

Bocconi University - Department of Finance; European University Institute - Robert Schuman Centre for Advanced Studies (RSCAS)

Multiple version iconThere are 2 versions of this paper

Date Written: November 4, 2011

Abstract

We develop a model in which asset commonality and short-term debt of banks interact to generate excessive systemic risk. Banks swap assets to diversify their individual risk. Two asset structures arise. In a clustered structure, groups of banks hold common asset portfolios and default together. In an unclustered structure, defaults are more dispersed. Portfolio quality of individual banks is opaque but can be inferred by creditors from aggregate signals about bank solvency. When bank debt is short-term, creditors do not roll over in response to adverse signals and all banks are inefficiently liquidated. This information contagion is more likely under clustered asset structures. In contrast, when bank debt is long-term, welfare is the same under both asset structures.

Keywords: Contagion, clustered and unclustered networks, interim information

JEL Classification: G01, G21

Suggested Citation

Allen, Franklin and Babus, Ana and Carletti, Elena, Asset Commonality, Debt Maturity and Systemic Risk (November 4, 2011). Available at SSRN: https://ssrn.com/abstract=1954810 or http://dx.doi.org/10.2139/ssrn.1954810

Franklin Allen (Contact Author)

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

Ana Babus

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

Imperial College London ( email )

South Kensington Campus
Exhibition Road
London, Greater London SW7 2AZ
United Kingdom

HOME PAGE: http://www.anababus.net

Elena Carletti

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

European University Institute - Robert Schuman Centre for Advanced Studies (RSCAS) ( email )

Villa La Fonte, via delle Fontanelle 18
50016 San Domenico di Fiesole
Florence, Florence 50014
Italy

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