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Insecure debt

Matta, Rafael and Perotti, Enrico (2015) Insecure debt. SRC Discussion Paper (No 41). Systemic Risk Centre, The London School of Economics and Political Science, London, UK.

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Abstract

We analyse bank runs under fundamental and asset liquidity risk, adopting a realistic description of bank default. We obtain an unique run equilibrium, even as fundamental risk becomes arbitrarily small. When safe returns are securitized and pledged to repo debt, funding costs are reduced but risk becomes concentrated on unsecured debt. We show the private choice of repo debt leads to more frequent unsecured debt runs. Thus satisfying safety demand via secured debt creates risk directly. Collateral fire sales upon default may reduce its liquidity and lead to higher haircuts, which further increase the frequency of runs.

Item Type: Monograph (Discussion Paper)
Official URL: http://www.systemicrisk.ac.uk/
Additional Information: © 2015 The Authors
Divisions: Systemic Risk Centre
Subjects: H Social Sciences > HG Finance
JEL classification: G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
G - Financial Economics > G2 - Financial Institutions and Services > G28 - Government Policy and Regulation
Sets: Research centres and groups > Systemic Risk Centre
Date Deposited: 21 Jan 2016 14:48
Last Modified: 15 Nov 2019 00:48
Projects: ES/K002309/1
Funders: ESRC
URI: http://eprints.lse.ac.uk/id/eprint/65099

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