from a financial recession using a model that can account for the observed default and leverage dynamics during the … account for the observed default and leverage dynamics. Following an adverse aggregate shock, banks deleverage through two …

specify default, renegotiation and reorganization policies. Renegotiation entails a redistribution of social surplus, while … reorganization takes the form of enhanced creditor monitoring. Firms with better contract histories are less likely to default, but …, contingent on default, firms with better outside options successfully renegotiate, in line with the empirical evidence. Unless …