'Rollover Risk, Bank Borrowing and Fragility '
|Date||6 March 2019|
|Time||11:00 - 12:15|
We study the borrowing choice of a bank subject to rollover risk in wholesale funding markets. The privately optimal level of debt balances the benefit of expanding profitable, yet illiquid, investment with the cost of a higher probability of a run on debt. We derive testable implications about bank leverage and fragility with respect to investment characteristics, balance sheet characteristics, and funding market conditions. Since the bank takes funding costs as given, both leverage and fragility are excessive. A prudential regulator can implement the socially optimal levels of debt and fragility with a leverage ratio.