Disclosures, Rollover Risk, and Debt Runs
Event details
| Date | 01.03.2016 |
| Hour | 12:00 › 13:00 |
| Speaker | Sylvain CARRE (PhD Student, SFI@EPFL) |
| Location | |
| Category | Conferences - Seminars |
Financial institutions issuing short-term debt collateralized by long-term assets are exposed to rollover risk: creditors may decide to run, forcing an inefficient liquidation of the assets. This paper investigates the impact of asset opacity and disclosure policy on short-term spreads dynamics, run probability and efficiency. When the initial quality of collateral is high, opacity reduces spreads and run likelihood: debt is money-like. This, however, only holds in the short run. At longer horizons, the lack of information raises concerns about the actual collateral value. Precisely because of opacity, the bank has difficulties to credibly address these concerns and runs become very likely. These runs are particularly inefficient as they often lead to liquidate good assets. All these effects are amplified when disclosure is voluntary rather than mandatory, i.e. when the bank has superior information and does not reveal bad news: the short-term protection is stronger but runs occur more often at longer horizons. The model concludes that opacity (i) only reduces run probability when the run probability under full information is low already, (ii) always decreases efficiency, (iii) is more inefficient when combined with voluntary disclosure. Another output of the model is to show how non-panic debt runs can occur suddenly, i.e. without news disclosure and as short-term spreads are very low. Contrary to panic runs, the trigger time of these runs is a function of the fundamentals.
Practical information
- Informed public
- Free