Short-Term Debt and Bank Risk

37 Pages Posted: 9 Dec 2016

See all articles by Brian Du

Brian Du

California State University, East Bay

Darius Palia

Rutgers University, Newark, School of Business-Newark, Department of Finance & Economics; Columbia University - Law School

Date Written: December 6, 2016

Abstract

The extant literature suggests that one of the main causes of the recent financial crisis has been the excessive use of short-term debt by banks [Gorton and Metrick (2012a, b)]. Using a large sample of banks we find that increases in repurchase agreements (repos) was recognized by external capital markets to increase bank risk in the pre-crisis period. In the crisis, we find a negative relationship between repos and risk. We attribute this result to evidence suggesting that “good” banks were able to continue funding their repos, whereas “bad” banks had to significantly decrease their repo funding.

Keywords: Repos; Short-Term Debt; Financial Crisis; Banking; Risk

JEL Classification: G01; G20; G21; G28

Suggested Citation

Du, Brian and Palia, Darius, Short-Term Debt and Bank Risk (December 6, 2016). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2881640

Brian Du

California State University, East Bay ( email )

25800 Carlos Bee Blvd.
Hayward, CA 94542
United States

Darius Palia (Contact Author)

Rutgers University, Newark, School of Business-Newark, Department of Finance & Economics ( email )

111 Washington Street
MEC 134
Newark, NJ 07102
United States
973-353-5981 (Phone)
973-353-1233 (Fax)

Columbia University - Law School ( email )

435 W 116th St.
New York, NY 10027
United States

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