124/2013 Lei Zhang, Lin Zhang and Yong Zheng
We use the global games approach to study key factors aﬀecting the credit risk associated with roll-over of bank debt. When creditors are heterogenous, these include the extent of short-term borrowing and capital market liquidity for repo ﬁnancing. Speciﬁcally, in a model with a large institutional creditor and a continuum of small creditors independently making their roll-over decisions based on private information, we ﬁnd that increasing the proportion of short-term debt and/or decreasing market liquidity reduces the willingness of creditors to roll over. This raises credit risk in equilibrium. The presence of a large creditor does not always reduce credit risk, however, unless it is better informed.
Culture and Development