Starting from the Merton framework for firm defaults we provide the analytics and robustness of the relationship between default probabilities and default correlations. We then derive the implication of these results for the impact of macroeconomic shocks on credit portfolios, for the pricing of...

In the presence of macroeconomic shocks severe enough to threaten the liquidity or solvency of the banking system, the regulator can rely on the funds concentration effect to save long-term investment projects. Some banks are forced into bankruptcy with the result that other banks obtain more...

In this paper, we show that the shortcomings of the unanimity rule can be alleviated by complementing it with the following constitutional principles: broad packages with many public projects can only be proposed once in a legislative term, the agenda setter needs to pay the highest taxes he is...

In this Paper, we design democratic constitutions that can transcend the shortcomings of the unanimity rule. The constitution embeds the unanimity rule in a set of virtue-supporting principles: (a) broad packages with many public projects (bundling) are allowed, but can only be proposed once in...

We examine whether the central bank council of a monetary union should publish its voting records when members are appointed by national politicians. We show that the publication of voting records lowers overall welfare if the private benefits of holding office are sufficiently low. High private...

This paper studies the question to what extent premia for macroeconomic risks in banking are sufficient to avoid banking crises. We investigate a competitive banking system embedded in an overlapping generation model subject to repeated macroeconomic shocks. We show that even if banks fully...

This paper provides a macroeconomic perspective for government interventions in banking crises. Such crises occur when a large number of banks fail to meet capital requirements or are insolvent. Using a macroeconomic model with financial intermediation, our analysis suggests that strict...

In a general equilibrium model we examine the optimal allocation of equity and debt across banks and industrial firms when both are plagued by incentive problems and firms can borrow from banks. Competition among banks will not result in a socially efficient level of equity. Imposing capital...

In this paper, we argue for a regulatory framework under which a bank's required level of equity capital depends on the equity capital of its peers. Such banking-on-the-average rules are transparent and could also be combined with the current regulatory framework. In addition, we argue that...

We examine banking competition when deposit or loan contracts contingent on macroeconomic shocks become feasible. We show that the risk allocation is efficient, provided that banks are not bailed out. In this case, banks may shift part of the risk to depositors. The private sector insures the...