Busts after periods of prolonged prosperity have been found to be catastrophic. Financial institutions increase their leverage and shift their portfolios towards projects that were previously considered too risky. This results from institutions rationally updating their expectations and becoming...

Bailing out banks requires overcoming debt overhang as well as dealing with adverseselection with respect to the quality of banks' balance sheets, in terms of heterogeneity inboth the likelihood and extent of their potential shortfalls, of future asset values vis-a-viscontractual debt...

Busts after periods of prolonged prosperity have been found to be catastrophic. Financial institutions increase their leverage and shift their portfolios towards projects that were previously considered too risky. This results from institutions rationally updating their expectations and becoming...

We compare competitive equilibrium outcomes with and without trading by an informed insider, in a model with ex ante aggregate investment choices which can not respond to any enhanced informational content of interim asset prices associated with insider trading. Noise trading is generated by...

We review the contemporary theory of financial intermediation. The focus is on the contribution in the past 15 years or so that have advanced our understanding of why financial intermediaries exist, the credit allocation decision and other services they provide in spot and forward credit...

We review the economics of bank regulation as developed in the contemporary literature. We begin with an examination of the central aspects of modern banking theories in explaining the asset transformation function of intermediaries, optimal bank liability contracts, coordination problems...