In summer 2011, elevated sovereign risk in Eurozone peripheral countries increased the solvency risk of Eurozone banks, precipitating a run on their short-term debt. We assess the effectiveness of different European Central Bank (ECB) interventions that followed – lender of last resort vs....

If monetary policy is to aim at financial stability, how would it change? To analyze this question, this paper develops a general-form, axiomatic framework. Financial stability objectives are shown to make a monetary authority more conservative and more aggressive. Conservative as it sets higher...

If monetary policy is to aim also at financial stability, how would it change? To analyze this question, this paper develops a general-form, axiomatic framework. Financial stability objectives are shown to make a monetary authority more aggressive. By that we mean that in reaction to negative...

This paper models a financial sector in which there is a feedback between individual bank risk and aggregate funding market problems. Greater individual risk taking worsens adverse selection problems on the market. But adverse selection premia on that market push up bank risk taking, leading to...

This paper shows that a rate hike has countervailing effects on banks' risk appetite. It reduces risk when the debt burden of the banking sector is modest. We model a regulator whose trade-off between bank risk and credit supply is derived from a welfare function. We show that the regulator...

Since the summer of 2007, the financial system has faced two major systemic crises. European banks have been at the center of both crises, particularly of the European sovereign debt crisis. This article analyzes systemic risk of European banks across both crises exploiting the specific...

This paper models a financial sector in which there is a feedback between individual bank risk and the extent of asymmetric information on banks' funding market. Greater individual risk taking worsens adverse selection problems. But adverse selection premia push up bank risk taking, leading to...

Why should monetary policy 'lean against the wind'? Can't bank regulation perform its task alone? We model banks that choose both asset volatility and leverage, and identify how monetary policy transmits to bank risk. Subsequently, we introduce a regulator whose tool is a risk-based capital...

If monetary policy is to aim also at financial stability, how would it change? To analyze this question, this paper develops a general-form framework. Financial stability objectives are shown to make monetary policy more aggressive: in reaction to negative shocks, cuts are deeper but...

We investigate the transmission of central bank liquidity to bank deposits and loan spreads in Europe over the period from January 2006 to June 2010. We find evidence consistent with an impaired transmission channel due to bank risk. Central bank liquidity does not translate into lower loan...