N°18-06: Anonymous Lending and Rollover Risk

Market design matters when heterogeneous borrowers roll over loans, facing funding shocks. Borrower anonymity is a key feature of various financial markets, such as short term, interbank lending markets. We show that anonymous markets experience systemic runs for large shocks, but provide insurance against rollover risk for moderate shocks. Insurance operates via loan contracts, pooling high and low quality borrowers, and is welfare enhancing when early liquidation of the project is costlier than continuation. Non anonymous markets allocate more funding to high quality borrowers, but moderate shocks trigger runs on low quality borrowers. When funding shocks have large variance, non anonymous markets generate larger welfare than anonymous markets. We study other market features, such as contract novation, default fund and collateral. In anonymous markets, novation and default fund reduce the risk of systemic runs. Collateral aligns private incentives with the socially optimal strategy, inducing the liquidation of inefficient projects.