Rollover risk as market discipline: A two-sided inefficiency

Arbeitspapier

Why does the market discipline that banks face seem too weak during good times and too strong during bad times? This paper shows that using rollover risk as a disciplining device is effective only if all banks face purely idiosyncratic risk. However, if banks' assets are correlated, a two-sided inefficiency arises: Good aggregate states have banks taking excessive risks, while bad aggregate states suffer from fire sales. The driving force behind this inefficiency is an amplifying feedback loop between asset liquidation values and market discipline. This feedback loop operates in both good and bad aggregate states, but with opposite effects.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Staff Report ; No. 597

Classification and Topics

• Classification: Wirtschaft ; Financial Crises ; Banks; Depository Institutions; Micro Finance Institutions; Mortgages ; Investment Banking; Venture Capital; Brokerage; Ratings and Ratings Agencies ; Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
• Subject: rollover risk ; market discipline ; bank runs ; fire sales ; global games

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Eisenbach, Thomas M.
• Event: Veröffentlichung
• (who): Federal Reserve Bank of New York
• (where): New York, NY
• (when): 2013

Further information

• Handle: http://hdl.handle.net/10419/93657
• Last update: 10.03.2025, 11:44 AM CET