regulatory requirements. Our analytic characterization of the bank policy choices shows that imposing solely liquidity … requirements leads to lower bank losses in default at the cost of an increased likelihood of default. Combining liquidity … requirements with leverage requirements reduces drastically both the likelihood of default and the magnitude of bank losses in …

bank when its partner bank fails. We investigate how capital constraints affect the choice of the healthy bank to takeover … or liquidate the exposure held jointly with the failing bank, and how the bank's ex ante optimal capital holding and … stock rather than preferred equity injection dilutes existing shareholder interests and gives the bank a greater incentive …