Short-term Debt and Systemic Risk∗

We study the liability structure decisions(short-term debt choices) of banks in a general equilibrium setting with multiple banks, depositors and external investors. The externalities appear through secondary market prices (positive) and overall systemic risk (negative). The private optimal choices are positively (negatively) correlated when the sign of the aggregate externality is positive (negative). The private optimum is inefficient relative to the first best because banks do not internalize the probability of other bank’s failure (or the deadweight costs associated with bankruptcies) when it increases its own debt. Ex-post interventions tend to be suboptimal and time-inconsistent, and in fact can accentuate collective moral hazard and systemic risk. JEL Classification: