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 a...

The paper analyzes a very stylized model of crises and demonstrates how the degree of strategic complementarity in the actions of investors is a critical determinant of fragility. It is shown how the balance sheet composition of a financial intermediary, parameters of the information structure...

This paper analyzes central bank policies on monitoring banks in distress when liquidity provisions are conditional on performance and a bad shock occurs. A sequential game model is used to analyze two policies: one in which the central bank acts with discretion and the second in which 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...

This is a draft of the first half of an open access textbook on game theory. I hope to complete the entire book by the end of 2015. After teaching game theory (at both the undergraduate and graduate level) at the University of California, Davis for 25 years, I decided to organize all my teaching...

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...

We conduct a laboratory experiment to examine under which circumstances a depositor-run at one bank may lead to a depositor-run at another bank. We implement two-person coordination games which capture the essence of the Diamond-Dybvig (1983) bank-run model. Subjects in the roles of followers...

The paper analyzes a very stylized model of crises and demonstrates how the degree of strategic complementarity in the actions of investors is a critical determinant of fragility. It is shown how the balance sheet composition of a financial intermediary, parameters of the information structure...