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 probability of inefficient bank liquidation. The bank's privately …

equity and towards deposits when creditor rights become stronger. These results suggest that bank equity, rather than … in bank leverage affect bank risk-taking. We find that increases in creditor rights increase bank risk-taking, but only …

uninnovative). The privately-optimal level of bank leverage is neither too low nor too high: It balances effi ciently the market … leverage. However, when correlated bank failures can impose significant social costs, regulators may bail out bank creditors … making bank debt too safe. The optimal capital regulation requires that a part of bank capital be unavailable to creditors …

central issues surrounding the role bank capital plays in financial stability. Because the socially efficient capital level … may entail various bank-level and social costs. Thus, despite agreement that higher capital would enhance banking … liquidity creation, higher bank values, and higher probabilities of surviving crises. Moreover, increases in capital …