We develop an operational model of information contagion and show how it may be integrated into a mainstream, top-down, stress-testing framework to quantify systemic risk. The key transmission mechanism is a two-way interaction between the beliefs of secondary market investors and the...

Using the model of Rochet and Vives (2004), this note shows that a prudential regulator can in general not mitigate a bank’s failure risk solely by means of liquidity requirements. However, their effectiveness can be restored if, in addition, minimum capital requirements are met. This provides...

Recent funding problems experienced by European sovereigns and the subsequent policy actions taken by European authorities have renewed interest in the international Lender of Last Resort (LLR). This paper constructs a global game LLR model applicable to both domestic and international contexts,...