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Moral hazard and debt maturity

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  • Huberman, Gur
  • Repullo, Rafael

Abstract

We present a model of the maturity of a bank’s uninsured debt. The bank borrows to invest in a long-term asset with endogenous and nonverifiable risk. This moral hazard problem leads to excessive risk-taking. Short-term debt may have a disciplining effect on risk-taking, but it may lead to overborrowing and/or inefficient liquidation. We characterize the conditions under which short- and long-term debt are feasible, and show circumstances where only short-term debt is feasible and where short-term debt dominates long-term debt when both are feasible. The results are consistent with some features of the period preceding the 2007-2009 global financial crisis.

Suggested Citation

  • Huberman, Gur & Repullo, Rafael, 2025. "Moral hazard and debt maturity," Journal of Financial Intermediation, Elsevier, vol. 61(C).
    • Handle: RePEc:eee:jfinin:v:61:y:2025:i:c:s1042957324000494
    DOI: 10.1016/j.jfi.2024.101121
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    Keywords

    Short-term debt; Long-term debt; Optimal financial contracts; Risk-shifting; Rollover risk; Overborrowing; Inefficient liquidation;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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