prices that banks pay for liquidity, captured here by borrowing rates in repos with the central bank and benchmarked by the … overnight index swap. We have price data at the individual bank level and, unique to this paper, data on individual banks … liquidity. We find that the price a bank pays for liquidity depends on the liquidity positions of other banks, as well as its …

We show that financial sector bailouts and sovereign credit risk are intimately linked. A bailout benefits the economy … two-way feedback between financial and sovereign credit risk using data on the credit default swaps (CDS) of the Eurozone … countries and their banks for 2007-11. We show that the announcement of financial sector bailouts was associated with an …

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 …

general framework for analysing trade-offs between policies for cleaning banks' balance sheets of bad debt. The framework - a … two-tier hierarchy consisting of regulators, banks, and firms - is applied to analyse three types of policies that have … of policy trade-offs. The analysis demonstrates that differing policies applied to financially distressed banks have …

policies of different central banks is examined. While the privately optimal level of bank capital decreases with regulatory … forbearing to less forbearing economies and reduces the competitive advantage of banks in less forbearing economies. Linking the … central bank’s forbearance to its alignment with domestic bankowners, it is shown that in equilibrium a regression towards the …

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 …

Two aspects of systemic risk, the risk that banks fail together, are modeled and their interaction examined. First, the … which banks endogenously hold correlated portfolios increasing the likelihood of joint failure. When bank loan returns have … cost of borrowing for the surviving banks. Such information contagion is thus costly to bank owners. Given their limited …

We examine screening incentives, welfare and the case for mandatory skin-in-the-game. Ex ante banks can screen, using …. Absent regulation, there is a separating equilibrium with voluntary retentions. If funding value is high, banks may instead … incentives. Under weaker conditions, banks instead sell the asset in transparent form, using tranching to increase hedging demand …

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 …