Hostname: page-component-7dd5485656-k8lnt Total loading time: 0 Render date: 2025-10-31T14:56:54.065Z Has data issue: false hasContentIssue false
  • English
  • Français

Short-Term Debt and Bank Risk

Published online by Cambridge University Press:  20 March 2018

Brian Du  and
Darius Palia
Get access Rights & Permissions [Opens in a new window]

Abstract

The extant literature suggests that one of the main causes of the recent financial crisis was the excessive use of short-term debt by banks. Using a large sample of banks, we find that increases in repurchase agreements (repos) were 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.

Information

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 53 , Issue 2 , April 2018 , pp. 815 - 835
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Article purchase

Temporarily unavailable

Footnotes

1

We thank Viral Acharya, Allen Berger, Patrick Bolton, Ryan Bubb, Martijn Cremer, Phil Davis, Gang Dong, Ronen Elul, Jeff Gordon, Zhiguo He, Arvind Krishnamurthy, Martin Oehmke, Hyun Shin, Ben Sopranzetti, Rene Stulz, Wei Xiong, and seminar participants at Columbia University and Rutgers University for helpful comments. Special thanks to Jarrad Harford (the editor) and two anonymous referees for comments that significantly improved the paper. All errors remain our responsibility.

References

Acharya, V.; Gale, D.; and Yorulmazer, T.. “Rollover Risk and Market Freezes.” Journal of Finance, 66 (2011), 1177–1209.Google Scholar
Acharya, V.; Pedersen, L.; Philippon, T.; and Richardson, M.. “Measuring Systemic Risk.” Review of Financial Studies, 13 (2017), 2–47.Google Scholar
Acharya, V.; Schnabl, P.; and Suarez, G.. “Securitization without Risk Transfer.” Journal of Financial Economics, 107 (2013), 515–536.Google Scholar
Acharya, V., and Skeie, D.. “A Model of Liquidity Hoarding and Term Premia in Inter-Bank Markets.” Journal of Monetary Economics, 58 (2011), 436–447.Google Scholar
Acharya, V., and Viswanathan, S.. “Leverage, Moral Hazard, and Liquidity.” Journal of Finance, 66 (2011), 99–138.CrossRefGoogle Scholar
Adrian, T., and Brunnermeier, M.. “CoVaR.” American Economic Review, 106 (2016), 1705–1741.Google Scholar
Allen, F., and Gale, D.. “Optimal Financial Crises.” Journal of Finance, 53 (1998), 1245–1284.CrossRefGoogle Scholar
Atkeson, A.; Eisfeldt, A.; and Weill, P.. “Measuring the Financial Soundness of U.S. Firms, 1926–2012.” Research in Economics, 71 (2017), 613–635.Google Scholar
Basel Committee on Banking Supervision (BCBS). Basel III: The Liquidity Coverage Ratio and Liquidity Risk Monitoring Tools. Bank of International Settlements(2013).Google Scholar
Basel Committee on Banking Supervision (BCBS). Basel III: The Liquidity Coverage Ratio and Liquidity Risk Monitoring Tools. Bank of International Settlements(2014).Google Scholar
Belsley, D.; Kuh, E.; and Welsch, R.. Regression Diagnostics: Identifying Influential Data and Sources of Collinearity. New York: John Wiley & Sons, Inc. (1980).CrossRefGoogle Scholar
Bernanke, B.“Liquidity Provision by the Federal Reserve.” Speech at the Risk Transfer Mechanisms and Financial Stability Workshop. Basel, Switzerland (2008).Google Scholar
Bolton, P.; Chen, H.; and Wang, N.. “A Unified Theory of Tobin’s q, Corporate Investment, Financing, and Risk Management.” Journal of Finance, 66 (2011), 1545–1578.Google Scholar
Brunnermeier, M.“Deciphering the Liquidity and Credit Crunch 2007–2008.” Journal of Economic Perspectives, 23 (2009), 77–100.Google Scholar
Brunnermeier, M.; Dong, G.; and Palia, D.. “Banks’ Non-Interest Income and Systemic Risk.” Working Paper, Princeton University (2016).Google Scholar
Brunnermeier, M., and Oehmke, M.. “The Maturity Rat Race.” Journal of Finance, 68 (2013), 483–521.Google Scholar
Bryant, J.“A Model of Reserves, Bank Runs, and Deposit Insurance.” Journal of Banking and Finance, 4 (1980), 335–344.Google Scholar
Cole, R., and White, L.. “Déjà Vu All Over Again: The Causes of U.S. Commercial Bank Failures This Time Around.” Journal of Financial Services Research, 42 (2011), 5–29.CrossRefGoogle Scholar
Cook, D., and Spellman, L.. “Federal Financial Guarantees and the Occasional Market Pricing of Default Risk: Evidence from Insured Deposits.” Journal of Banking and Finance, 15 (1991), 1113–1130.Google Scholar
Copeland, A.; Martin, A.; and Walker, M.. “Repo Runs: Evidence from the Tri-Party Repo Market.” Journal of Finance, 69 (2014), 2343–2380.CrossRefGoogle Scholar
Cornett, M.; McNutt, J.; Strahan, P.; and Tehranian, H.. “Liquidity Risk Management and Credit Supply in the Financial Crisis.” Journal of Financial Economics, 101 (2011), 297–312.Google Scholar
Covitz, D.; Liang, N.; and Suarez, G.. “The Evolution of a Financial Crisis: Collapse of the Asset-Backed Commercial Paper Market.” Journal of Finance, 68 (2013), 815–848.Google Scholar
De Jonghe, O.“Back to the Basics in Banking? A Micro-Analysis of Banking System Stability.” Journal of Financial Intermediation, 19 (2010), 387–417.Google Scholar
Demsetz, R., and Strahan, P.. “Diversification, Size, and Risk and Bank Holding Companies.” Journal of Money, Credit and Banking, 29 (1997), 300–313.Google Scholar
DeYoung, R., and Rice, T.. “Noninterest Income and Financial Performance at U.S. Commercial Banks.” Financial Review, 39 (2004), 101–127.Google Scholar
Diamond, D., and Dybvig, P.. “Bank Runs, Deposit Insurance, and Liquidity.” Journal of Political Economy, 91 (1983), 401–419.Google Scholar
Diamond, D., and He, Z.. “A Theory of Debt Maturity: The Long and Short of Debt Overhang.” Journal of Finance, 69 (2014), 719–762.CrossRefGoogle Scholar
Du, B.“How Useful Is Basel III’s Liquidity Coverage Ratio? Evidence from US Bank Holding Companies.” European Financial Management, 23 (2017), 902–919.CrossRefGoogle Scholar
Fahlenbrach, R.; Prilmeier, R.; and Stulz, R.. “This Time Is the Same: Using Bank Performance in 1998 to Explain Bank Performance during the Recent Financial Crisis.” Journal of Finance, 67 (2012), 2139–2185.Google Scholar
Federal Deposit Insurance Corporation (FDIC). “Study on Core Deposits and Brokered Deposits.” Submitted to Congress Pursuant to the Dodd–Frank Wall Street Reform and Consumer Protection Act. Washington, DC: Government Printing Office (2011).Google Scholar
Flannery, M., and James, C.. “The Effect of Interest Rate Changes on the Common Stock Returns of Financial Institutions.” Journal of Finance, 39 (1984a), 1141–1153.Google Scholar
Flannery, M., and James, C.. “Market Evidence on the Effective Maturity of Bank Assets and Liabilities.” Journal of Money, Credit and Banking, 16 (1984b), 435–445.CrossRefGoogle Scholar
Gatev, E.; Schuermann, T.; and Strahan, P.. “Managing Bank Liquidity Risk: How Deposit-Loan Synergies Vary with Market Conditions.” Review of Financial Studies, 22 (2009), 995–1020.Google Scholar
Gennaioli, N.; Shleifer, A.; and Vishny, R.. “Neglected Risks, Financial Innovation, and Financial Fragility.” Journal of Financial Economics, 104 (2012), 452–468.CrossRefGoogle Scholar
Goetz, M.; Laeven, L.; and Levine, R.. “Does the Geographic Expansion of Banks Reduce Risk?” Journal of Financial Economics, 120 (2016), 346–362.Google Scholar
Goldberg, L., and Hudgins, S.. “Depositor Discipline and Changing Strategies for Regulating Thrift Institutions.” Journal of Financial Economics, 63 (2002), 263–274.CrossRefGoogle Scholar
Goldstein, I., and Pauzner, A.. “Demand-Deposit Contracts and the Probability of Bank Runs.” Journal of Finance, 60 (2005), 1293–1327.Google Scholar
Gorton, G.“The Subprime Panic.” European Financial Management, 15 (2009), 10–46.Google Scholar
Gorton, G., and Metrick, A.. “Securitized Banking and the Run on Repo.” Journal of Financial Economics, 104 (2012a), 425–451.Google Scholar
Gorton, G., and Metrick, A.. “Who Ran on Repo.” Working Paper, Yale University (2012b).Google Scholar
Hanson, S. G.; Shleifer, A.; Stein, J.; and Vishny, R.. “Banks as Patient Fixed-Income Investors.” Working Paper, Harvard University (2014).Google Scholar
He, Z., and Xiong, W.. “Dynamic Debt Runs.” Review of Financial Studies, 25 (2012a), 1799–1843.CrossRefGoogle Scholar
He, Z., and Xiong, W.. “Rollover Risk and Credit Risk.” Journal of Finance, 67 (2012b), 391–430.Google Scholar
Holmstrom, B., and Tirole, J.. “Liquidity and Risk Management.” Journal of Money, Credit, and Banking, 32 (2000), 295–319.Google Scholar
Kacperczyk, M., and Schnabl, P.. “When Safe Proved Risky: Commercial Paper during the Financial Crisis of 2007–2009.” Journal of Economic Perspectives, 24 (2010), 29–50.CrossRefGoogle Scholar
Krishnamurthy, A.“How Debt Markets Have Malfunctioned in the Crisis.” Journal of Economic Perspectives, 24 (2010), 3–28.CrossRefGoogle Scholar
Krishnamurthy, A.; Nagel, S.; and Orlov, D.. “Sizing Up Repo.” Journal of Finance, 69 (2014), 2381–2417.Google Scholar
Laeven, L., and Levine, R.. “Bank Governance, Regulation and Risk Taking.” Journal of Financial Economics, 93 (2009), 259–275.CrossRefGoogle Scholar
Martin, A.; Skeie, D.; and von Thadden, E.-L.. “Repo Runs.” Review of Financial Studies, 27 (2014), 957–989.Google Scholar
Morris, S., and Shin, H.. “Illiquidity Component of Credit Risk.” International Economic Review, 57 (2016), 1135–1148.Google Scholar
Pathan, S.“Strong Boards, CEO Power and Bank Risk-Taking.” Journal of Banking and Finance, 33 (2009), 1340–1350.Google Scholar
Petersen, M.“Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches.” Review of Financial Studies, 22 (2009), 435–480.Google Scholar
Purnanandam, A.“Originate-to-Distribute Model and the Subprime Mortgage Crisis.” Review of Financial Studies, 24 (2011), 1881–1915.CrossRefGoogle Scholar
Rochet, J., and Vives, X.. “Coordination Failures and the Lender of Last Resort: Was Bagehot Right After All?” Journal of European Economic Association, 2 (2004), 1116–1147.Google Scholar
Saunders, A.; Strock, E.; and Travlos, N.. “Ownership Structure, Deregulation, and Bank Risk Taking.” Journal of Finance, 45 (1990), 643–654.Google Scholar
Shin, H.“Securitisation and Financial Stability.” Economic Journal, 119 (2009), 309–332.Google Scholar
Stiroh, K.“Diversification in Banking: Is Noninterest Income the Answer?” Journal of Money, Credit and Banking, 36 (2004), 853–882.CrossRefGoogle Scholar
Stiroh, K.“New Evidence on the Determinants of Bank Risk.” Journal of Financial Services Research, 30 (2006), 237–263.Google Scholar