Loan commitments increase a bank's risk by obligating it to issue future loans under terms that it might otherwise refuse. However, moral hazard and adverse selection problems potentially may result in these contracts being rationed or sorted. Depending on the relative risks of the borrowers who...

A study that demonstrates multiple equilibria in a class of principal-agent models and that examines the convergence properties of contracts as risk aversion approaches zero.

The authors examine whether credit-spread curves, engendered by a mandatory subordinated-debt requirement for banks, would help predict bank risk. They extract the credit-spread curves each quarter for each bank in our sample, and analyze the information content of credit-spread slopes. They...

To examine whether mandating banks to issue subordinated debt would enhance market monitoring and control risk-taking, the authors extract the credit-spread curve for each banking firm in their sample. After controlling for changes in market and liquidity variables, they find that changes in...

We study the macroeconomic implications of the debt overhang distortion. In our model, the distortion arises because investment is non-contractible—when a firm borrows funds, the debt contract cannot specify or depend on the firm’s future level of investment. After the debt contract is...

We present a simple model of systemic risk and show how each financial institution’s contribution to systemic risk can be measured and priced. An institution’s contribution, denoted systemic expected shortfall (SES), is its propensity to be undercapitalized when the system as a whole is...

An analysis of how central-bank exchange-market intervention can affect both the level of exchange rates and the risk premium in asset returns, showing how the risk premium is related to the conditional variances of intervention and other exogenous processes.

An investigation of the effects of credit risk and interest-rate risk on bank portfolio choices, showing how bank capital inadequacy may prevent a bank from investing in the optimal portfolio and how the efficiency of the bank's intermediation technology affects its choice of second-best portfolio.

Comparing the degree to which idiosyncratic and disaggregate macro shocks (such as regional and industry shocks) are not shared in the economy provides greater understanding of why the economy lacks risk-sharing arrangements in specific areas and can suggest areas where the economy’s...