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Wholesale Funding, Coordination, and Credit Risk

Author

Listed:
  • Zhang, Lei

    (University of Warwick)

  • Zhang, Lin

    (Southwestern University of Finance and Economics)

  • Zheng, Yong

    (Southwestern University of Finance and Economics)

Abstract

We use the global games approach to study key factors a?ecting 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 ?nancing. Speci?cally, 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 ?nd 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.

Suggested Citation

  • Zhang, Lei & Zhang, Lin & Zheng, Yong, 2013. "Wholesale Funding, Coordination, and Credit Risk," CAGE Online Working Paper Series 124, Competitive Advantage in the Global Economy (CAGE).
  • Handle: RePEc:cge:wacage:124
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    File URL: http://www2.warwick.ac.uk/fac/soc/economics/research/centres/cage/manage/publications/124.2013_zhang.pdf
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    References listed on IDEAS

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    Keywords

    Credit Risk; Coordination; Debt Crisis; Private information; Global games;

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