The headline numbers appear to show that even as banks and financial intermediaries suffered large credit losses in the financial crisis of 2007-09, they raised substantial amounts of new capital, both from private investors and through government-funded capital injections. However, on closer...

In spite of mounting losses banks continued to pay dividends during the crisis. We present a model that addresses this behavior. By paying out dividends, a bank transfers value to its shareholders away from creditors, among whom are other banks. This way, one bank's dividend payout policy...

We consider a model in which banks face two moral hazard problems: 1) asset substitution by shareholders, which can occur when banks make socially-inefficient, risky loans; and 2) managerial under-provision of effort in loan monitoring. The privately-optimal level of bank leverage is neither too...

While losses were accumulating during the 2007-09 financial crisis, many banks continued to maintain a relatively smooth dividend policy. We present a model that explains this behavior in a setting where there are financial externalities across banks. In particular, by paying out dividends, a...

This paper studies a credit market with adverse selection and moral hazard where sufficient sorting is impossible. The crucial novel feature is the competition between lenders in their choice of contracts offered. The quality of investment projects is unobservable by banks and entrepreneurs’...

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...

Systemic risk is modeled as the endogenously chosen correlation of returns on assets held by banks. The limited liability of banks and the presence of a negative externality of one bank’s failure on the health of other banks give rise to a systemic risk-shifting incentive where all banks...

Fire sales that occur during crises beg the question of why sufficient outside capital does not move in quickly to take advantage of fire sales, or in other words, why outside capital is so slow-moving. We propose an answer to this puzzle in the context of an equilibrium model of capital...

We study liquidity transfers between banks through the interbank borrowing and asset sale markets when (i) surplus banks providing liquidity have market power, (ii) there are frictions in the lending market due to moral hazard, and (iii) assets are bank-specific. We show that when the outside...

The merit of having international convergence of bank capital requirements in the presence of divergent closure policies of different central banks is examined. While the privately optimal level of bank capital decreases with regulatory forbearance (they are strategic substitutes), the socially...