Business cycles imply liquidity risks for banks. This paper explores how these risks influence bank lending over the cycle. With forward-looking banks, lending cycles, credit booms and busts, or suppressed and highly fragile bank systems can emerge, depending on the magnitude of liquidity risks....

We show how banks' excessive risk-taking, stemming from informational asymmetries in loan markets, can lead to an excessive output loss when a recession starts. Risk-based capital requirements can alleviate the output loss by reducing excessive risk-taking in ‘normal' times. Model simulations...

Even after controlling for local economic conditions, differences in state bank supervision and regulation contribute toward explaining the large variation in state bank suspension rates across U.S. counties during the Great Depression. More stringent capital requirements lowered suspension...

Even after controlling for local economic conditions, differences in state bank supervision and regulation contribute toward explaining the large variation in state bank suspension rates across U.S. counties during the Great Depression. More stringent capital requirements lowered suspension...