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Ignorance Is Bliss? Anonymous Lending with Roll over Risk
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Paper
Ignorance Is Bliss? Anonymous Lending with Roll over Risk
2017
Overview
We provide a model of banks' short-term funding and study the conditions influencing roll over risk. Our model reproduces the major differences between U.S. and Euro short-term funding markets. Anonymous, short-term markets are resilient against larger liquidity shocks. Non- anonymous markets however improve welfare by allocating resources efficiently. An anonymous Central Counterparty (CCP) is therefore welfare improving in a liquidity crisis but detrimental to welfare in normal times. The insurance mechanism on the CCP, which transfers wealth from high to low quality borrowers, always increases the market's resilience against a liquidity shock.
Publisher
Federal Reserve Bank of St. Louis
Subject
