Banks, debt maturity and financial crises

Abstract

We develop a model in which the maturity of external debt of banks, their level of international reserves, and the term structure of interest rates are jointly determined. Self-fulfilling runs may occur, and banks take this possibility into account when choosing the structure of their assets and liabilities. If the probability of a run is sufficiently small, banks will deliberately choose an illiquid asset-liability position and expose themselves to a run. In that case, short term debt will be cheaper than long term debt, and the maturity structure of foreign debt will depend on attitudes towards risk. (C) 2000 Elsevier Science B.V. All rights reserved.