The recent global financial crisis has ignited a debate on whether easy monetary conditions can lead to greater bank risk-taking. We study this issue in a model of leveraged financial intermediaries that endogenously choose the riskiness of their portfolios. When banks can adjust their capital...

The recent global financial crisis has brought the debate on how interest rates affect bank risk-taking to center stage. Proponents of this new risk-taking channel of monetary policy have argued that the low interest–rate environment in the run-up to the crisis may have created incentives for...

This paper examines how the informational structure of loan markets interacts with banks' strategic behavior in determining lending standards, lending volumes, and the aggregate allocation of credit. In a setting where banks obtain private information about their clients' creditworthiness, we...

This paper shows that competition among regulators reduces regulatory standards relative to a centralized solution. It suggests that a central regulator is more likely to emerge for homogeneous and financially integrated countries. The paper proves these results in a model where regulators...

We analyze the incentives for independent domestic bank regulators to form a regulatory union when their jurisdictions are financially integrated. Because of externalities in bank regulation, competition among regulators reduces regulatory standards relative to the Pareto optimum, making the...

Private information obtained by lenders leads to borrowercapture to the extent that such information cannot be communicated credibly to outsiders. We analyze how this capture affects the loan portfolio allocation of informed lenders. First, we show that banks charge higher interest rates and...

Banks offering credit to borrowers are faced with uncertainty about their creditworthiness. If banks obtain information about borrowers after lending to them, they are able to reject riskier borrowers when refinancing. Potential entrant banks will face an adverse-selection problem stemming from...

This paper presents a model of bank risk taking and government guarantees. Levered banks take excessive risk, as their actions are not fully priced at the margin by debt holders. The impact of government guarantees on bank risk taking depends critically on the portion of bank investors that can...

This paper identifies different sources of risk as important determinants of banks' corporate structures when expanding into new markets. Subsidiary-based corporate structures benefit from greater protection against economic risk because of affiliate-level limited liability, but are more exposed...