The Maturity Rat Race

By Markus K. Brunnermeier, Martin Oehmke. 2013

408 citations recorded by the source corpus.

We develop a model of endogenous maturity structure for financial institutions that borrow from multiple creditors. We show that a maturity rat race can occur: an individual creditor can have an incentive to shorten the maturity of his own loan to the institution, allowing him to adjust his financing terms or pull out before other creditors can. This, in turn, causes all other lenders to shorten their maturity as well, leading to excessively short-term financing. This rat race occurs when interim information is mostly about the probability of default rather than the recovery in default, and is most pronounced during volatile periods and crises. Overall, firms are exposed to unnecessary rollover risk.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/6a6487a4e12b5118cbcffcc2f0a4af8c2d6fd783

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Citations in the corpus

Should Derivatives Be Privileged in Bankruptcy (2014, neutral): “…debt dilution: through risk shifting (e.g., Jensen and Meckling (1976)), via the issuance of additional senior or short-term debt (e.g., Fama and Miller (1972), Diamond (1993a,b), Brunnermeier and Oehmke (2013)), or by granting security interest to some creditors (e.g., Bebchuk and Fried (1996)).”
Determinants of Bank Interest Margins: Impact of Maturity Transformation (2015, background): “Recent financial intermediation theory suggests that banks operate with too high maturity mismatch (e.g. Segura and Suarez, 2012; Brunnermeier and Oehmke, 2012).”
Debt Maturity Structure and Credit Quality (2014, background): “…any rollover losses resulting from refinancing of short-term debt (e.g., due to fire sales of assets under the pressure of short-term creditors) will ultimately jeopardize the firm’s ability to repay its long-term creditors in future (Brunnermeier and Oehmke (2011) and Morris and Shin (2009)).”
Banking and Trading (2012, neutral): “The former corresponds to the move to the right on the axes of Figure 3, while the latter points to a shift from case 2 to case 1 in the figure (with lower max; note from (8) that max shrinks for lower values of ).”
Where the Risks Lie: A Survey on Systemic Risk (2017, positive): “Research in recent years has shown that the institutional settings of modern financial markets may make them more fragile than initially thought, in particular due to heavy reliance on short-term funding (rationalized by Brunnermeier and Oehmke, 2013b, as already discussed).”
Asset commonality, debt maturity and systemic risk. (2012, background): “Calomiris and Kahn (1991) and Diamond and Rajan (2001) argue that short-term debt can play a role as a discipline device to ensure that managers behave optimally.”
Financial Connections and Systemic Risk (2010, neutral): “Brunnermeier and Oehmke (2009) suggest that creditors shorten the maturity of their claims to obtain priority, leading to an excessive use of short term debt.”
Incentives to Innovate and Financial Crises (2012, neutral): “For example, Brunnermeier and Oehmke (2010) show that an individual creditor could have an incentive to shorten the maturity of its own loan to the bank, so that, conditional on adverse information, it has the opportunity to pull out before other creditors can.”
Rollover Risk, Network Structure and Systemic Financial Crises (2012, neutral): “Brunnermeier and Oehmke (2010) develop a model of the equilibrium maturity st ructure for a financial institution that borrows from multiple creditors, whi le Diamond and Rajan (2011) show how liquidity risk can arise from the fear of asse t fir sales.”