Short-Term Debt and Bank Risk

The extant literature suggests that one of the main causes of the recent financial crisis has been the excessive use of short-term debt by banks [Gorton and Metrick (2012a, b)]. Using a large sample of banks we find that increases in repurchase agreements (repos) was recognized by external capital markets to increase bank risk in the pre-crisis period. In the crisis, we find a negative relationship between repos and risk. We attribute this result to evidence suggesting that “good” banks were able to continue funding their repos, whereas “bad” banks had to significantly decrease their repo funding