The paper studies risk mitigation associated with capital regulation, in a context where banks may choose tail risk … assets. We show that this undermines the traditional result that higher capital reduces excess risk-taking driven by limited … liability. Moreover, higher capital may have an unintended e¤ect of enabling banks to take more tail risk without the fear of …

Financial crises are associated with reduced volumes and extreme levels of rates for term inter-bank transactions, such … leveraged banks’ precautionary demand for liquidity. When adverse asset shocks materialize, a bank’s ability to roll over debt … is impaired because of agency problems associated with high leverage. In turn, a bank’s propensity to hoard liquidity is …

In this paper we investigate whether banks that borrow from other banks have lower risk levels. We concentrate on a … hypothesis that long-term interbank exposures result in lower risk of the borrowing banks. …

Two aspects of systemic risk, the risk that banks fail together, are modeled and their interaction examined. First, the … ex-post aspect, in which the failure of a bank brings down a surviving bank as well, and second, the ex-ante aspect, in … which banks endogenously hold correlated portfolios increasing the likelihood of joint failure. When bank loan returns have …

This Paper shows that bank closure policies suffer from a ‘too-many-to-fail’ problem: when the number of bank failures … is large, the regulator finds it ex-post optimal to bail out some or all failed banks, whereas when the number of bank … systemic risk, the risk that many banks may fail together. The ex-post optimal regulation may thus be sub-optimal from an ex …

This Paper develops a broad concept of systemic risk, the basic economic concept for the understanding of financial … related payment and settlement systems. At the heart of systemic risk are contagion effects, various forms of external effects … systemic risk, which has evolved swiftly in the last couple of years, is surveyed in the light of this concept. Various …

As the number of bank failures increases, the set of assets available for acquisition by the surviving banks enlarges … for liquidation of banking assets. At a sufficiently large number of bank failures, and in turn, at a sufficiently low … and allowing the regulator to price-discriminate against outsiders in the market for bank sales. …

Bank liquidity is a crucial determinant of the severity of banking crises. In this paper, we consider the effect of … welfare question as to when there is too much or too little liquidity on bank balance sheets relative to the socially optimal …