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 …

Two aspects of systemic risk, the risk that banks fail together, are modeled and their interaction examined. First, the …

Systemic risk is modeled as the endogenously chosen correlation of returns on assets held by banks. The limited … systemic risk-shifting incentive where all banks undertake correlated investments, thereby increasing economy-wide aggregate … risk. Regulatory mechanisms such as bank closure policy and capital adequacy requirements that are commonly based only on a …

large amount of aggregate tail risk is missing from the price of financial sector crash insurance during the financial …

their risk assessments and outcomes to those from a simple methodology that relies on publicly available market data and … market data; (iii) This discrepancy arises due to the reliance on regulatory risk weights in determining required levels of … capital once stress-test losses are taken into account. In particular, the continued reliance on regulatory risk weights in …

focus on individual, rather than systemic, risk of financial institutions. Focusing on systemically important assets and … capable of inducing market discipline and mitigating moral hazard, but also capable of addressing the associated systemic risk …, for instance, due to the risk of fire sales of collateral assets. Furthermore, because of our focus on SIALs, our proposed …

We model corporate liquidity policy and show that aggregate risk exposure is a key determinant of how firms choose … with high aggregate risk find it costly to get credit lines and opt for cash in spite of higher opportunity costs and … liquidity premium. Likewise, in times when aggregate risk is high, firms rely more on cash than on credit lines. We verify these …

their equity bid-ask spreads, we find evidence that the bankruptcy contributed to increasing adverse selection risk as well … as inventory holding risk. Moreover, we find supporting evidence that the degree of competition among market makers did …