We develop a model of the joint capital structure decisions of banks and their borrowers. Strikingly high bank leverage … emerges naturally from the interplay between two sets of forces. First, seniority and diversification reduce bank asset … underlie our structural model, we can quantify the impact capital regulation and other government interventions have on bank …

. In a financial crisis bank health is significantly damaged. Post-crisis regulatory changes have aimed at restoring bank … health, but measuring bank health by Tobin's Q, we find that the ill health of banks in the recent U.S. financial crisis and … by the state of the macro-economy. The results seem to suggest that bank regulatory changes may be repressive …

their investors. We show the bank has to have a fragile capital structure, subject to bank runs, in order to perform these … functions. Far from being an aberration to be regulated away, the funding of illiquid loans by a bank with volatile demand … such as narrow banking and bank capital requirements …

recession caused by other forces. Based on a VAR and new data on the sources of bank failures in the 1930s from Richardson (2007 …), we find that illiquidity shocks played a key role in explaining the bank failures during the Friedman and Schwartz …