The moral hazard incentives of the bank safety net predict that distressed banks take on more risk and higher leverage … include financial crises and are subject to different regulatory regimes (1985–1994, 2005–2014). We find that distressed banks …

Liquidity production is a central function of banks. High leverage is optimal for banks in a model that has just enough … frictions for banks to have a meaningful role in liquid-claim production. The model has a market premium for (socially valuable … premium, banks with risky assets use risk management to maximize their capacity to include such debt in the capital structure …