This paper examines whether the systemic risk of financial institutions is associated with the risk-taking incentives generated by executive compensation. We measure managerial risk-taking incentives with the sensitivities of chief executive officer (CEO) and chief financial officer (CFO)...

Pecuniary externalities in models with financial friction justify macroprudential policies for preventing economic agents' excessive risk taking. We extend the Diamond and Rajan (2012) model of banks with the production factors and explore how a pecuniary externality affects a bank's leverage....

Pecuniary externalities in models with financial friction justify macroprudential policies for preventing economic agents'excessive risk taking. We extend the Diamond and Rajan (2012) model of banks with the production factors and explore how a pe- cuniary externality affects a bank's leverage....

We develop a model in which margin procyclicality, asset market depth and banks' propensity for liquidity hoarding interact to generate a systemic liquidity crisis. In this model, banks trade derivatives to hedge market risk or to speculate on interest rate movements. To mitigate counterparty...

We show that, in the presence of correlated investment opportunities across firms, risk sharing between firm shareholders and firm managers leads to compensation contracts that include relative performance evaluation. These contracts bias investment choices towards correlated investment...

This paper studies systemic risk in the interbank market. We first establish that in the German interbank lending market, a few large banks intermediate funding flows between many smaller periphery banks and that shocks to these intermediary banks in the financial crisis spill over to the...

In this paper we introduce two measures, the Systemic Liquidity Buffer (SLB) and the Systemic Liquidity Shortfall (SLS) to assess liquidity in the banking system. The SLB takes an aggregated perspective on liquidity risks in the banking system. In contrast, the SLS focusses on the problematic...

This study predicts and finds that chief executive officer (CEO) risk-taking incentives induced by stock option compensation increase a bank’s contribution to systemic distress risk and systemic crash risk. We also predict and find that this CEO incentive–systemic risk relation operates...

This paper presents a new approach to endogenize interbank credit networks, based on banks' specialty that their liabilities are accepted as a means of payment. This approach takes into account how borrowing on banks' asset side affects depositing on their liability side in general equilibrium....

We propose a new theory of systemic risk based on Knightian uncertainty (or "ambiguity"). We show that, due to uncertainty aversion, beliefs on future asset returns are endogenous, and bad news on one asset class induces investors to be more pessimistic about other asset classes as well. This...