Supervisory stress tests assess the impact of an adverse macroeconomic scenario on the profitability and capitalisation of a large number of banks. The results of such stress test exercises have recently been disclosed to the public in an attempt to restore confidence and to curb bank opaqueness...

This article develops a model that studies how the presence of a lender of last resort (LOLR) affects the ex ante investment incentives of banks. We show that a perfectly informed LOLR induces a first-best outcome for small and medium sized banks but causes moral hazard in larger banks given the...

This article extends the application of global games of Goldstein and Pauzner (2005) in the banking model of Diamond and Dybvig (1983) to account for correlation in the quality of banks’ long term investment, when banks are linked through cross deposits and there is a central bank. The goal is...

The present study investigates theoretically the lending responses of government-owned and private banks in the event of unexpected financial shocks. Our model predicts that public banks provide more loans to the real sector during times of crisis, compared to private banks which cut down on...

This paper analyzes market discipline in a many-bank economy where contagion and bank runs interact. We present a model with differently-informed depositors, where those depositors that are more informed have incentives to monitor banks’ investments. It is shown that when banks are...