The global financial crisis highlighted that the financial system can be most vulnerable when it seems most stable. This paper models non-linear dynamics in banking. Small shocks can lead from an equilibrium with few bank defaults straight to a full freeze. The mechanism is based on...

This paper models a financial sector in which there is a feedback between individual bank risk and aggregate funding market problems. Greater individual risk taking worsens adverse selection problems on the market. But adverse selection premia on that market push up bank risk taking, leading to...

This paper models a financial sector in which there is a feedback between individual bank risk and the extent of asymmetric information on banks' funding market. Greater individual risk taking worsens adverse selection problems. But adverse selection premia push up bank risk taking, leading to...