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Short-Term Debt and Bank Risk

Published online by Cambridge University Press:  20 March 2018

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.

Type
Research Article
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

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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.

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