When hiring an adviser (he), a policy maker (she) often faces the problem that she has incomplete information about his preferences. Some advisers are good, in the sense that their preferences are closely aligned to the policy maker's preferences, and some advisers are bad. Recently, some...

The paper studies risk mitigation associated with capital regulation, in a context when banks may choose tail risk assets. We show that this undermines the traditional result that higher capital reduces excess risk-taking driven by limited liability. When capital raising is costly, poorly...

We analyse the poisonous interaction between bank rescues, financial fragility and sovereign debt discounts. In our model balance sheet constrained financial intermediaries finance both capital expenditure of intermediate goods producers and government deficits. The financial intermediaries face...

We highlight the ex ante risk-shifting incentives faced by a bank's shareholders/managers when CoCos (contingent convertible capital) are part of the capital structure. The risk shifting incentive arises from the wealth transfers that the shareholders will receive upon the CoCo's conversion...

Can the risk of losses upon premature liquidation produce bank runs? We show how a unique run equilibrium driven by asset liquidity risk arises even under minimal fundamental risk. To study the role of illiquidity we introduce realistic norms on bank default, such that mandatory stay is...

Does demand for safety create instability ? Secured (repo) funding can be made so safe that it never runs, but shifts risk to unsecured creditors. We show that this triggers more frequent runs by unsecured creditors, even in the absence of fundamental risk. This effect is separate from the...

We use project-level information for the largest regional economic development program in German history to study whether government subsidies to firms affect quantity and quality of bank lending. We combine recipient firms under the Improvement of Regional Economic Structures program (GRW) with...