Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/93657
Authors: 
Eisenbach, Thomas M.
Year of Publication: 
2013
Series/Report no.: 
Staff Report, Federal Reserve Bank of New York 597
Abstract: 
Why does the market discipline that banks face seem too weak during good times and too strong during bad times? This paper shows that using rollover risk as a disciplining device is effective only if all banks face purely idiosyncratic risk. However, if banks' assets are correlated, a two-sided inefficiency arises: Good aggregate states have banks taking excessive risks, while bad aggregate states suffer from fire sales. The driving force behind this inefficiency is an amplifying feedback loop between asset liquidation values and market discipline. This feedback loop operates in both good and bad aggregate states, but with opposite effects.
Subjects: 
rollover risk
market discipline
bank runs
fire sales
global games
JEL: 
G01
G21
G24
G32
Document Type: 
Working Paper

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