We study the interbank lending and asset sales markets in which banks with surplus liquidity have market power, frictions arise in lending due to moral hazard, and assets are bank-specific. Illiquid banks have weak outside options that allow surplus banks to ration lending, resulting in...

Banks face two different kinds of moral hazard problems: asset substitution by shareholders (e.g., making risky, negative net present value loans) and managerial rent seeking (e.g., investing in inefficient “pet” projects and consuming perquisites that yield private benefits). The privately...

Dividend payouts affect the relative value of claims within a firm. When firms have contingent claims on each other, as in the banking sector, dividend payouts can shift the relative value of stakeholders' claims across firms. Through this channel, one bank's capital policy affects the equity...

We consider a model in which the threat of bank liquidations by creditors as well as equity-based compensation incentives both discipline bankers, but with different consequences. Greater use of equity leads to lower ex ante bank liquidity, whereas greater use of debt leads to a higher...

Banks face two different kinds of moral hazard problems: asset substitution by shareholders (e.g., making risky, negative net present value loans) and managerial rent seeking (e.g., investing in inefficient 'pet' projects and consuming perquisites that yield private benefits). The privately...

This paper is an attempt to explain the changes to finance sector reforms under the Dodd-Frank Act in the United States and Basel III requirements globally; their unintended consequences; and lessons for currently fast-growing emerging markets concerning finance sector reforms, government...

This paper is an attempt to explain the changes to finance sector reforms under the Dodd-Frank Act in the United States and Basel III requirements globally; their unintended consequences; and lessons for currently fast-growing emerging markets concerning finance sector reforms, government...