We study financial stability with constraints on central bank intervention. We show that a forced reallocation of liquidity across banks can achieve fewer bank failures than a decentralized market for interbank loans, reflecting a pecuniary externality in the decentralized equilibrium....

Since the 2007-09 financial crisis, researchers have debated whether compensation plans drove excessive risk-taking or financial managers simply underestimated the risks of various investments. Through a principal-agent model with heterogeneous beliefs, we show that principals offer contracts...

Central counterparty default waterfalls act as a last line of defense in over-the-counter markets by managing and allocating resources to cover defaults of clearing members and clients. However, central counterparties face competing objectives in setting up their default waterfalls. In this...