Stuart Greenbaum and Anjan Thakor bring a unique analytical approach to the subject of banks and banking in this completely revised and updated new edition. They expand the scope of the typical bank management course by addressing all types of deposit-type financial institutions and by...

We study how financial system architecture evolves through the development of banks and financial markets. The predominant existing view is that banks and markets compete, which often contradicts actual patterns of development. We show that banks and markets exhibit three forms of interaction:...

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...

We develop a theory of optimal bank leverage in which the benefit of debt in inducing loan monitoring is balanced against the benefit of equity in attenuating risk-shifting. However, faced with socially-costly correlated bank failures, regulators bail out creditors. Anticipation of this...

We develop a theory of optimal bank leverage in which the benefit of debt in inducing loan monitoring is balanced against the benefit of equity in attenuating risk-shifting. However, faced with socially-costly correlated bank failures, regulators bail out creditors. Anticipation of this...

In extant theories of why banks exist, banks originate and hold loans, and this skin in the game is essential for the provision of intermediation services. In reality, loans are traded in secondary markets, raising the question: does trading diminish the value of the bank's core intermediation...

This paper briefly discusses the causes of the 2007-09 financial crisis and the extent to which the systemic risk that buffeted this crisis was linked to excessive leverage. It then focuses on what is needed for a healthy financial system that has a relatively low probability of a systemic...

I develop a theory of political influence on bank lending and capital structure. The idea is that legislators may want to direct bank credit to politically-favored loans that reduce bank shareholder wealth, but generate social and/or political benefits. The regulator, who implements the laws...

This note discusses some issues in bank closure policy from a financial stability standpoint and how these issues have evolved since we first raised the question of how a reputation-driven divergence of interests between bank regulators and taxpayers may distort bank closure policy in our 1993...

An extensive review of the evidence related to the 2007-09 crisis reveals that it was an insolvency risk crisis, not a liquidity crisis. The appropriate post-crisis regulatory reform should therefore focus on increasing capital requirements. The Basel III liquidity requirements do not serve a...