. Anticipation of this generates an equilibrium featuring systemic risk in which all banks choose inefficiently high leverage to fund …

risk in which all banks choose inefficiently high leverage to fund correlated assets and market discipline is compromised … ; systemic risk ; bailout ; forbearance ; moral hazard ; capital requirements …

We study a dynamic contracting problem in which size is relevant. The agent may take on excessive risk to enhance short … curb risk taking. Firms that are less prone to risk taking can afford a higher leverage …