We analyze shareholders' incentives to change the leverage of a firm that has already borrowed substantially. As a result of debt overhang, shareholders have incentives to resist reductions in leverage that make the remaining debt safer. This resistance is present even without any government...

This paper offers a critical survey of the swings in banking regulation, notably with reference to leverage and risk weighted ratios. At the outset the distinction is made between economic and regulatory capital and between private vs social costs/benefits of equity finance for banking firms....

We consider a borrower who must get a loan from a lender to start a project. The loan is secured by an insurer, who takes the project and the lender's loss at default. The borrower grants the insurer a fraction of the loan (fee-for-guarantee swap, FGS) or of the project's equity...

The efficiency of federal lending guarantees depends on whether guarantees increase lending supply, or simply act as a subsidy to lenders. We use notches in the guarantee rate schedule for loans backed by the Small Business Administration to estimate the elasticity of bank lending volume to loan...

Using transaction-level trade data from China Customs and loan data from the China Development Bank (CDB), we analyze how government-subsidized credit in China affects its exports and the economic activities in the U.S. We find that CDB credit to strategic industries at the top of supply chains...

With a license to use individually identifiable information, including college transcripts, we find that students who quit college courses are 13% more likely to default on student loans than their perseverant peers, controlling for conventional risk factors. This effect is especially strong...

We empirically quantify the sensitivity of investments to uncertain property rights by drawing upon the Northern Pacific's massive land grant and the ensuing political and legal battle that generated significant uncertainty to title. To overcome the empirical challenge that property rights and...

We model dynamic bank capital structure under three optimally-designed regulatory regimes dealing with potential default { bailout, where government provides capital; bail-in, using private-sector funds; and no regulatory intervention, allowing failure. Only under optimally designed bail-in do...

This paper proposes a novel regulatory framework for financial interconnectedness and introduces a new concept: “self-contained networks”. In networks where each bank is too costly for other banks to let fail, banks endogenously rescue each other. Such networks are self-contained since they...