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We analyze the optimal pricing of government-sponsored bank debt guarantees within the context of an asset substitution framework. We show that the desirability of fair pricing of guarantees depends on the degree of transparency of the banking sector: in relatively opaque banking systems, fair...
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This article presents a model in which, contrary to conventional wisdom, competi- tion can make banks more reluctant to take excessive risks: As competition intensifies and margins decline, banks face more-binding threats of failure, to which they may respond by reducing their risk-taking. Yet,...
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I study a model of market-liquidity provision by levered intermediaries that, besides operating trading desks, run deposit-taking franchises. Levered intermediaries’ heightened incentive to absorb risk helps to counteract liquidity-provision frictions that, in an unlevered economy, would lead...
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