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Wholesale Funding, Coordination, and Credit Risk

  • Zhang, Lei

    (University of Warwick)

  • Zhang, Lin

    (Southwestern University of Finance and Economics)

  • Zheng, Yong

    (Southwestern University of Finance and Economics)

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.

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Paper provided by Competitive Advantage in the Global Economy (CAGE) in its series CAGE Online Working Paper Series with number 124.

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Date of creation: 2013
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Handle: RePEc:cge:wacage:124
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