Deteriorating public finances around the world raise doubts about countries’ abilities to bail out their largest banks …. For an international sample of banks, this paper investigates the impact of government indebtedness and deficits on bank … respond negatively to deficits. We present evidence that in 2008 systemically large banks saw a reduction in their market …

Systemic risk is modeled as the endogenously chosen correlation of returns on assets held by banks. The limited … liability of banks and the presence of a negative externality of one bank’s failure on the health of other banks give rise to a … systemic risk-shifting incentive where all banks undertake correlated investments, thereby increasing economy-wide aggregate …

is large, the regulator finds it ex-post optimal to bail out some or all failed banks, whereas when the number of bank … failures is small, failed banks can be acquired by the surviving banks. This gives banks incentives to herd and increases … systemic risk, the risk that many banks may fail together. The ex-post optimal regulation may thus be sub-optimal from an ex …

As the number of bank failures increases, the set of assets available for acquisition by the surviving banks enlarges … but the total amount of available liquidity within the surviving banks falls. This results in ‘cash-in-the-market’ pricing … level of asset prices, there are too many banks to liquidate and inefficient users of assets who are liquidity-endowed may …

crisis. The difference in costs of out-of-the-money put options for individual banks, and puts on the financial sector index … financial sector, which lowers index put prices far more than those of individual banks, explains the divergence in the basket …

This paper presents evidence of banks using accounting discretion to overstate the value of distressed assets. In … particular, we show that the stock market applies far greater discounts to a bank’s real estate loans and mortgage … smaller for distressed banks, as these banks derive relatively large benefits from the financial safety net to offset asset …