The role that banks play in screening and monitoring their borrowers is well understood. However, these bank activities … question – who monitors the monitor? Financial intermediation theories posit that bank capital structure plays such a role in … incentivizing banks to monitor their borrowers. Both bank debt and bank equity have been proposed in various theories as providing …

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 …

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 …

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 …

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 …

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 …