TitleAn examination of rollover risk and the credit crisis
NameDu, Brian (author), Palia, Darius (chair), Davies, Phil (internal member), Sopranzetti, Ben (internal member), Cremers, Martijn (outside member), Rutgers University, Graduate School - Newark,
Banks and banking,
Banks and banking--Accounting,
Global Financial Crisis, 2008-2009
DescriptionThe first essay examines the roots of the current financial crisis motivated by the existing literature as the banks’ inability to rollover extreme short-term debt due to the maturity mismatch of assets and liabilities. More specifically, I examine the firm-level effects of measures of rollover risk from short-term assets (liquidity) and short-term liabilities (rollover frequency and brokered deposits) on various market measures of risk including total risk, interest rate risk, and firm specific risk using a multi-index market model. Results suggest that rollover risk is an important factor in determining total bank risk, interest rate risk, and firm-specific risk in bank holding companies from 2002 to 2010. Additionally, I find that measures of liquidity have an insignificant effect on bank risk while net repurchase agreements and brokered deposits are the dominate contributors to rollover risk. Results are robust to a number of control variables as well as to controls for large outliers in the sample. These results are important for bank managers, analysts, investors and regulators for distinguishing among the relative exposures to bank risk utilizing information that is readily available and discernable from bank balance sheets and income statements. The second essay examines the relationship between proxies for rollover risk constructed in the first essay and its relationship with long-run bank performance during the crisis. While the drying up of liquidity in the repo market and over-reliance on repos have been blamed for the failure of major banks, I find evidence which suggests that banks that used more repos as a fraction of total borrowings prior to the crisis actually performed better during the crisis. This result is robust to a number of specifications and control variables. I find evidence that banks which used less repos prior to the crisis and banks which had lower returns during the crisis experienced trouble to access the repo market long before the crisis. This essay also examines the relationship between executive pay alignment and excessive risk-taking. While controlling for CEO pay performance, I do not find any interaction between banks’ financing choice of repos and executive alignment with shareholder incentives providing evidence against risk-shifting incentives or the risk-aversion hypothesis.
NoteIncludes bibliographical references
Noteby Brian Du
CollectionGraduate School - Newark Electronic Theses and Dissertations
Organization NameRutgers, The State University of New Jersey
RightsThe author owns the copyright to this work.