Board of Governors of the Federal Reserve System

April 2013

Revenge of the Steamroller: ABCP as a Window on Risk Choices

Carlos Arteta, Mark Carey, Ricardo Correa, and Jason Kotter

Abstract:

We empirically examine financial institutions' motivations to take systematic bad-tail risk in the form of sponsorship of credit-arbitrage asset-backed commercial paper vehicles. A run on debt issued by such vehicles played a key role in causing and propagating the liquidity crisis that began in the summer of 2007. We find evidence consistent with important roles for both owner-manager agency problems and government-induced distortions, especially government control or ownership of banks.

Keywords: Risk decisions, systemic risk, bank runs, financial crisis, commercial paper

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