We offer a theory of financial c ontagion b ased o n t he i nformation c hoice o f i nvestors after observing a financial crisis e lsewhere. We study global coordination games of regime change in two regions linked by an initially unobserved macro shock. A crisis in region 1 is a wake-up call to...

How do real interest rates affect financial fragility? We study this issue in a model in which bank borrowing is subject to rollover risk. A bank's optimal borrowing trades off the benefit from investing additional funds into profitable assets with the cost of greater risk of a run by bank...

We study third-party loan guarantees in a model in which lenders can screen, learn loan quality over time and can sell loans before maturity when in need of liquidity. Loan guarantees improve market liquidity and reduce lending standards, with a positive overall welfare effect. Guarantees...

We explore the relationship between asset encumbrance and bank funding in the context of covered bonds a form of collateralized debt. Covered bond issuance influences the incidence of bank runs by unsecured creditors and, in turn, conditions in the unsecured funding market influence the bank s...

We propose a model of asset encumbrance by banks subject to rollover risk and study the consequences for fragility, funding costs, and prudential regulation. A bank's choice of encumbrance trades off the benefit of expanding profitable investment funded by cheap long-term secured debt against...

We examine the effect of ex-post information contagion on the ex-ante level of systemic risk defined as the probability of joint bank default. Because of counterparty risk or common exposures, bad news about one bank reveals valuable information about another bank, triggering information...

We examine insurance against loan default when lenders can screen in primary markets at a heterogeneous cost and learn loan quality over time. In equilibrium, low-cost lenders screen loans but some high-cost lenders insure them. Insured loans are risk-free and liquid in a secondary market, while...

We examine the portfolio choice of banks in a micro-funded model of runs. To insure riskaverse investors against liquidity risk, competitive banks offer demand deposits. We use global games to link the probability of a bank run to the portfolio choice. Based upon interim information about risky...

We examine insurance against loan default when lenders can screen in primary markets at a heterogeneous cost and learn loan quality over time. In equilibrium, low-cost lenders screen loans, but some high-cost lenders insure them. Insured loans are risk-free and liquid in a secondary market,...

We model the opacity and deposit rate choices of banks that imperfectly compete for uninsured deposits, are subject to runs, and face a threat of entry. We show how shocks that increase bank competition or bank transparency increase deposit rates, costly withdrawals, and thus bank fragility....