In the wake of the global financial crisis that erupted in 2008, there has been extensive commentary and regulatory focus on the 'Too Big to Fail' issue. In this paper, we survey the proposed solutions and regulatory initiatives that have been undertaken. We conduct a longitudinal analysis of...

I revisit the Diamond-Dybvig model of liquidity insurance in the presence of hidden trades. The key result is that in this environment deposit-taking banks are not necessary for the efficient provision of liquidity. Mutual funds are constrained efficient when supplemented with the same...

This paper studies how financial intermediation varies across banks. Bank size is a first-order determinant of banks' capital structure in the cross-section. Largest banks have the lowest capital-to-asset ratio and the lowest ratio of Tier-1 capital against risk-weighted assets. These large...

We investigate liquidity shocks and shocks to fundamentals during financial crises at commercial banks, investment banks, and hedge funds. Liquidity shock amplification models assume that widespread funding problems cause fire sales. We find that most banks do not experience funding declines...

This paper studies a newly compiled data set of annual balance sheets of more than 11,000 commercial banks across 17 advanced economies since 1870. The new data expose the central role of large banks for credit cycles and financial instability throughout modern financial history and the...

We develop a simple model that looks at the incentives of private banks to behave prudentially and undertake costly efforts to lower the probability of bankruptcy or having to be bailed out by a lender of last resort. Government regulators can force banks to increase efforts beyond the privately...

Increases in firm default risk raise the default probability of banks while decreasing output and inflation in US data. To rationalize the empirical evidence, we analyse firm risk shocks in a New Keynesian model where entrepreneurs and banks engage in a loan contract and both are subject to...

This paper compares the consequences of equity injections into banks with purchases of corporate and government bonds in a financial crisis situation using a New Keynesian model in which non-financial firms predominantly take non-market-based debt from banks instead of issuing securities. Our...

We study the interaction between a government's bailout policy and banks' willingness to impose losses on (or \bail in") their investors. The government has limited commitment and may choose to bail out banks facing large losses. The anticipation of this bailout undermines a bank's private...

The explicit or implicit protection of banks through government bail-out policies is a universal phenomenon. We analyze the competitive effects of such policies in two models with different degrees of transparency in the banking sector. Our main result is that the bail-out policy unambiguously...