We develop a simple model of banking regulation with two policy instruments: minimum capital requirements and supervision of domestic banks. The regulator faces a trade-off: high capital requirements cause a drop in the banks'; profitability, while strict supervision reduces the scope of...

In this paper, I suggest that the regulation of the financial system, especially if the aim is to prevent financial crises, should be focused on dealing with the consequences of the crises, not on trying to avoid their causes, although it may seem counterintuitive at first sight. Contrary to the...

Systemic risk - the possibility that an individual firm's failure will result in broad damages to the economy as a whole - is the epitome of financial crisis. Bailouts of troubled firms have long been the standard response to systemic risk. Yet, bailouts suffer from problems of political...

The Deposit Guarantee Directive enlarges the role of DGSs in supporting and financing with alternative interventions, the early research of “market solutions” that may avoid the failure of a bank. Despite the broad mandate formally set out in the Directive, the feasibility of the failure...

An important, emerging literature suggests that the proximate cause of the recent financial crisis was an old-fashioned bank run of the sort that was common prior to the Great Depression. But instead of individuals converging on the local savings and loan, this bank run involved investment...

We study the interaction between a government's bailout policy and banks' willingness to impose losses on (or \bail in") their investors. The government has limited commitment and may choose to bail out banks facing large losses. The anticipation of this bailout undermines a bank's private...

Banks use internal models to optimize risk weights and better account for the specific risk of each asset. As the choice of risk weights affects the regulatory capital ratio, economic theory suggests that banks with a higher cost of equity should be more aggressive in reducing risk weights. We...

We develop a model of bailout stigma in which accepting bailouts may signal firms' financial troubles and worsen subsequent financing conditions. Bailout stigma can lead to low or even no take-up of otherwise attractive bailout offers, the failure of immediate market revival, or a government...

The rise of a crisis-prone banking sector and its political power has received significant attention following the most recent financial crisis. The crisis sparked a growing interest in understanding how and why we have created a world of large, unstable banks. Excessive banking activity arose...