Theory suggests that government aid to banks may either reduce or increase systemic risk. We are the first to address this issue empirically, analyzing the Troubled Assets Relief Program (TARP). Analysis suggests that TARP significantly reduced contributions to systemic risk, particularly for...

Prudential bank supervision is designed to enhance financial stability, but we are unaware of research linking this supervision to financial system risk. In particular, there are no prior findings on how supervisory enforcement actions (EAs) – major tools of supervisors – affect systemic...

We find that bank liquidity creation (LC) is statistically and economically significantly positively related to real economic output (GDP). This is robust to using instrumental variables and many robustness checks. LC also beats bank assets in “horse races.” On-balance sheet LC matters more...

While operational risk is generally perceived as idiosyncratic with limited systemic implications, we document that operational risk significantly threatens financial stability. Using supervisory data on large U.S. bank holding companies (BHCs) over 2002:Q1-2016:Q4, we find operational losses...

We present a life cycle view of how systemic risks build during a boom, are realized during the following crisis, and are addressed in the aftermath. We also offer potential explanations of the seemingly irrational behavior by private-sector agents and policy makers. We show how the model...