What do we mean by risk in relation to financial institutions? Financial institutions choose the level of risk that maximizes the objectives of those who run them, subject to constraints and penalties imposed by those who regulate them and by capital markets. If the incentives of managers are...

We empirically examine financial institutions' motivations to take systematic bad-tail risk in the form of sponsorship of credit-arbitrage asset-backed commercial paper vehicles. A run on debt issued by such vehicles played a key role in causing and propagating the liquidity crisis that began in...