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Wholesale funding, coordination, and credit risk

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Zhang, Lei, Zhang , Lin and Zheng, Yong (2013) Wholesale funding, coordination, and credit risk. Working Paper. Coventry, UK: Department of Economics, University of Warwick. CAGE Online Working Paper Series, Volume 2013 (Number 124).

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Abstract

We use the global games approach to study key factors affecting the credit risk
associated with roll-over of bank debt. When creditors are heterogenous, these include
the extent of short-term borrowing and capital market liquidity for repo financing.
Specifically, in a model with a large institutional creditor and a continuum of small
creditors independently making their roll-over decisions based on private information,
we find that increasing the proportion of short-term debt and/or decreasing market
liquidity reduces the willingness of creditors to roll over. This raises credit risk in equilibrium.
The presence of a large creditor does not always reduce credit risk, however,
unless it is better informed.

Item Type: Working or Discussion Paper (Working Paper)
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HG Finance
Divisions: Faculty of Social Sciences > Economics
Library of Congress Subject Headings (LCSH): Banks and banking, Debt, Credit, Risk, Economics -- Mathematical models
Series Name: CAGE Online Working Paper Series
Publisher: Department of Economics, University of Warwick
Place of Publication: Coventry, UK
Official Date: 2013
Dates:
DateEvent
2013Published
Volume: Volume 2013
Number: Number 124
Number of Pages: 32
Institution: University of Warwick
Status: Not Peer Reviewed
Publication Status: Published
Access rights to Published version: Open Access (Creative Commons)
Date of first compliant deposit: 1 August 2016
Date of first compliant Open Access: 1 August 2016
Funder: University of Warwick, China. Jiao yu bu [Ministry of Education]

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