Disclosures, Rollover Risk, and Debt Runs

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Financial institutions (``banks'') issuing short-term debt collateralized by long-term assets are exposed to rollover risk: creditors may decide to run and trigger costly liquidation.

I investigate the impact of asset opacity and disclosure policy on short-term spreads dynamics, run probability and efficiency.

If collateral is good enough initially, opacity reduces spreads and run likelihood: debt is information-insensitive and 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 respond credibly. Debt loses its information-insensitive status and runs become likely. These runs are particularly inefficient due to a pooling effect: they can occur on good assets.
All these effects are amplified when disclosure is voluntary rather than mandatory: the short-term protection is stronger but runs occur more often in the long run.
I conclude that opacity (i) only reduces run probability when the run probability under full information is low already,(ii) decreases efficiency when liquidation costs are high,(iii) is more inefficient when combined with voluntary disclosure. Moreover, bond yields are derived endogenously and contain an opacity component. Finally, the model exhibits seemingly panic-driven runs, the trigger time of which is in fact a function of the fundamentals.

Author(s):

Sylvain Carré    
Ecole Polytechnique Fédérale de Lausanne
Switzerland