trade off between risk and return. Banks may mitigate the resultant excessive risk by costly monitoring, where greater risk … reduction requires more resources devoted to risk supervision. Hence, the excessive risk associated with moral hazard is … endogenously determined. We show that a drop in banks' cost of funds increases the risk tolerated by banks in a competitive …

risk on the borrower side. The impacts of such reserve requirements on the equilibrium degree of default risk and borrowing … introduction of a reserve requirement in either country reduces the risk of default and raises the welfare of both the high income …