Financial intermediation naturally arises when borrowers' payoffs are correlated. I show this using a costly enforcement model in which lenders need ex post incentives to enforce payments from defaulted loans. When projects have correlated outcomes, learning the state of one project (via...

This paper investigates how financial-sector leverage affects macroeconomic instability and household welfare. In the model, banks use leverage to allocate resources to productive projects and provide liquidity. When banks do not actively issue new equity, aggregate outcomes depend on the level...

This paper uses a general equilibrium model with collateralized borrowing to show that increases in risk can have ambiguous effects on leverage, loan margins, loan amounts, and asset prices. Increasing risk about future payoffs can lead to riskier loans with larger balances and lower spreads...