This paper proposes a new regulatory approach that implements capital requirements contingent on managerial compensation. We argue that excessive risk taking in the financial sector originates from the shareholder moral hazard created by government guarantees rather than from corporate...

This paper presents a new theory that explains why it is beneficial for banks to be highly interconnected and to engage in herding behavior. It shows that these two important causes of systemic risk are interdependent and thus cannot be considered in isolation. The reason is that banks have an...

This paper studies the link between government guarantees for banks and bank asset concentration. We show theoretically that these guarantees, when combined with high leverage, incentivize banks to further invest in asset classes they are already heavily exposed to: the risk-taking via asset...