The Maturity Rat Race

Brunnermeier, Markus K.; Oehmke, Martin

doi:10.3386/w16607

Cited by 128 publications

(142 citation statements)

References 27 publications

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“…Specifically, relative to corporations that can match maturities of assets and liabilities, the business model of a financial institution almost necessarily involves maturity and liquidity mismatch (see, e.g., Diamond and Dybvig (1983) and Brunnermeier, Gorton, and Krishnamurthy (2013)). Moreover, beyond the maturity mismatch that is inherent in their business model, financial institutions may have an additional incentive to take on significant maturity mismatch because of collective moral hazard (Farhi and Tirole (2012)) or because their inability to commit to longer-term financing leads to a maturity rat race (Brunnermeier and Oehmke (2013)). …”

Section: Modelmentioning

confidence: 99%

Predatory Short Selling

Brunnermeier

Oehmke

2013

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Financial institutions may be vulnerable to predatory short selling. When the stock of a financial institution is shorted aggressively, leverage constraints imposed by short-term creditors can force the institution to liquidate long-term investments at fire sale prices. For financial institutions that are sufficiently close to their leverage constraints, predatory short selling equilibria co-exist with no-liquidation equilibria (the vulnerability region) or may even be the unique equilibrium outcome (the doomed region). Increased coordination among short sellers expands the doomed region, where liquidation is the unique equilibrium. Our model provides a potential justification for temporary restrictions on short selling of vulnerable institutions and can be used to assess recent empirical evidence on short-sale bans.

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Section: Modelmentioning

confidence: 99%

Predatory Short Selling

Brunnermeier

Oehmke

2013

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“…We need some default on the short term debt so that payment on long term debt is accelerated and the bank is run at date 1. The notion that short term debt could make itself whole through contingent actions thus precipitating wider consequences is in Diamond (1991) and Rajan and Winton (1995), as well as Brunnermeier and Oehmke (2009).…”

Section: ) Sources Of Illiquiditymentioning

confidence: 99%

Fear of Fire Sales, Illiquidity Seeking, and Credit Freezes *

Diamond

Rajan

2011

The Quarterly Journal of Economics

524

244

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Is there any need to "clean" up a banking system in the midst of a crisis, for instance, by closing some weak banks and forcing others to sell bad assets, or can one wait till the crisis is over? We argue that an "overhang" of impaired banks that may be forced to sell assets in the future can increase the private returns to holding illiquid assets sufficiently that weak banks have no interest in selling them. Anticipating a potential future fire sale, cash rich buyers have high expected returns to holding cash, which also reduces their incentive to lock up money in term loans. The potential for a worse fire sale than necessary, as well as the associated decline in credit origination, could make the crisis worse, which is one reason it may make sense to clean up the system even in the midst of the crisis. We discuss alternative ways of cleaning up the system, and the associated costs and benefits.JEL codes: G21, G01, G28.

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“…We rule out dilution by adopting the Leland (1994bLeland ( , 1998 setting in Section 4. For dilution issues, see Diamond (1993), Brunnermeier and Oehmke (2011), and Hackbarth and Mauer (2011), and related discussion in Section 4.6.2. Information.…”

Section: Example Settingmentioning

confidence: 99%

A Theory of Debt Maturity: The Long and Short of Debt Overhang

Diamond¹,

He²

2012

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Debt maturity influences debt overhang: the reduced incentive for highly-levered borrowers to make real investments because some value accrues to debt. Reducing maturity can increase or decrease overhang even when shorter-term debt's value depends less on firm value. Future overhang is more volatile for shorter-term debt, making future investment incentives volatile and influencing immediate investment incentives. With immediate investment, shorter-term debt typically imposes lower overhang; longer-term debt can impose less if firm value is more volatile in bad times. For future investments, reduced correlation between the value of assets-in-place and profitability of investment increases the overhang of shorter-term debt.

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The Maturity Rat Race

Cited by 128 publications

References 27 publications

Predatory Short Selling

Predatory Short Selling

Fear of Fire Sales, Illiquidity Seeking, and Credit Freezes *

A Theory of Debt Maturity: The Long and Short of Debt Overhang

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