The credit derivatives market provides a liquid but opaque forum for secondary market trading of banking assets. I show that when entrepreneurs rely upon the certification value of bank debt to obtain cheap bond market finance, the existence of a credit derivatives market may cause them to issue...

We consider an economy in which banks increase social welfare by monitoring but where the verifiable part of banking income is stochastic. Banks abstract non-verifiable returns and this can render banking contracts unattractive to investors. The survival of the banking sector is ensured by a...

We present a model for financial fragility in which there is uncertainty over risk management parameters and there is a danger of disinvestment caused by heightened risk aversion. Projects in small economies are assumed to be riskier than those in large economies. In this situation there is a...

We examine the interdependency between loan officer compensation contracts and commercial bank internal reporting systems (IRSs). The optimal incentive contract for bank loan officers may require the bank headquarters to commit not to act on certain types of information. The headquarters can...

We analyse a model of financial intermediation in which intermediaries are subject to moral hazard and they do not invest socially optimally, because they ignore the systemic costs of failure and, in the case of banks, because they fail to account for risks which are assumed by the deposit...