Banks are optimally opaque institutions. They produce debt for use as a transaction medium (bank money), which requires that information about the backing assets - loans - not be revealed, so that bank money does not fluctuate in value, reducing the efficiency of trade. This need for opacity...

Economic growth involves metamorphosis of the financial system. Forms of banks and bank money change. These changes, if not addressed, leave the banking system vulnerable to crisis. There is no greater challenge in economics than to understand and prevent financial crises. The financial crisis...

This paper surveys the role of the Federal Reserve within the financial regulatory system, with particular attention to the interaction of the Fed's role as both a supervisor and a lender-of-last-resort (LOLR). The institutional design of the Federal Reserve System was aimed at preventing...

Central banking is intimately related to liquidity provision to banks during times of crisis, the lender-of-last-resort function. This activity arose endogenously in certain banking systems. Depositors lack full information about the value of bank assets so that during macroeconomic downturns...

We document that the percentage of all U.S. assets that are "safe" has remained stable at about 33 percent since 1952. This stable ratio is a rare example of calm in a rapidly changing financial world. Over the same time period, the ratio of U.S. assets to GDP has increased by a factor of 2.5,...

All economists should be conversant with "what happened?" during the financial crisis of 2007-09. We select and summarize sixteen documents, including academic papers and reports from regulatory and international agencies. This reading list covers the key facts and mechanisms in the build-up of...

Empirical evidence suggests that banks playa unique role in the savings-investment process, affecting firms' cost of capital and the level of investment. We argue that bank uniqueness is related to how the design of bank loan contracts allows banks to affect borrowers' choice of project risk....

We study whether the socially optimal level of stability of the banking system can be implemented with regulatory capital requirements in a multi-period general equilibrium model of banking. We show that: (i) bank capital is costly because of the unique liquidity services provided by demand...

In the last ten to fifteen years financial derivative securities have become an important, and controversial, product for commercial banks. The controversy concerns whether the size, complexity, and risks associated with these securities, the difficulties with accurately reporting timely...

The credit crisis was sparked by a shock to fundamentals, housing prices failed to rise, which led to a collapse of trust in credit markets. In particular, the repurchase agreement market in the U.S., estimated to be about $12 trillion, larger than the total assets in the U.S. banking system...