. 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 develop a theory of optimal bank leverage in which the benefit of debt in inducing loan monitoring is balanced … against the benefit of equity in attenuating risk-shifting. However, faced with socially-costly correlated bank failures …, regulators bail out creditors. Anticipation of this generates multiple equilibria, including one with systemic risk in which …

We develop a theory of optimal bank leverage in which the benefit of debt in inducing loan monitoring is balanced … against the benefit of equity in attenuating risk-shifting. However, faced with socially-costly correlated bank failures …, regulators bail out creditors. Anticipation of this generates multiple equilibria, including one with systemic risk in which …

risk in which all banks choose inefficiently high leverage to fund correlated assets and market discipline is compromised …