perquisites that yield private benefits). The privately optimal level of bank leverage is neither too low nor too high: It … substitution induced at high levels of leverage. However, when correlated bank failures can impose significant social costs …, governments may have no option but to bail out bank creditors. Anticipation of this generates an equilibrium featuring systemic …

Financial crises are associated with reduced volumes and extreme levels of rates for term inter-bank loans, reflected … liquidity. Asset shocks impair a bank's ability to roll over debt because of agency problems associated with high leverage. In …, inter-bank markets can completely freeze. -- inter-bank lending ; financial crisis ; precautionary demand ; rollover risk …

Starting in March 2023, depositor runs quickly led to the failures of Silicon Valley Bank (SVB), Signature Bank, and … First Republic Bank. In the wake of higher interest rates, uninsured depositors of these banks had lost confidence in their … supervisory capacity to deal with a large number of bank failures were they to materialize? Will regulators respond with alacrity …

liability of banks and the presence of a negative externality of one bank's failure on the health of other banks give rise to a … risk. Regulatory mechanisms such as bank closure policy and capital adequacy requirements that are commonly based only on a … bank's own risk fail to mitigate aggregate risk-shifting incentives, and can, in fact, accentuate systemic risk. Optimal …

We show that limited liability can induce profit-maximizing bank owners to herd with other banks. When bank loan … returns have a systematic factor, the failure of one bank conveys adverse information about this systematic factor and … increases the cost of borrowing for the surviving banks relative to the situation of no bank failures. Such information …

ex-post aspect, in which the failure of a bank brings down a surviving bank as well, and second, the ex-ante aspect, in … which banks endogenously hold correlated portfolios increasing the likelihood of joint failure. When bank loan returns have … a systematic factor, the failure of one bank conveys adverse information about this systematic factor and increases the …

We examine the regulatory design problem of a central bank whose objective is to ensure an optimal level of individual … as well as systemic risk of bank failure in an economy with possibly heterogeneous banks. We model systemic risk as the … externality of one bank's failure on the health of other banks, there is a systemic risk-shifting incentive where all banks …

I analyze the joint design of two bank regulatory mechanisms: minimum capital requirements, which are an ex …-ante mechanism to prevent bank failures, and closure policy, which is an ex-post mechanism to manage the cost of bank failures. At … requirements is thus tied to the extent of forbearance exercised by the central bank's closure policy. This warrants a closer …

We consider liquidity transfers between banks through the inter-bank borrowing and asset sale markets when banks … providing liquidity may have market power and assets may be bank-specific. We show that when the outside options of liquidity … bank-specific assets. A regulator such as a Central Bank can ameliorate this inefficiency by standing to lend to affected …