This article presents a model in which, contrary to conventional wisdom, competi- tion can make banks more reluctant to take excessive risks: As competition intensifies and margins decline, banks face more-binding threats of failure, to which they may respond by reducing their risk-taking. Yet,...

This paper develops a model in order to explore how a banks equity stake in a competitor of a borrower affects the financing relationship with the borrower and product market outcomes.

This paper develops a contracting framework in order to explore the effects of credit derivatives on banks incentives to monitor loans, their incentives to intervene, and, ultimately, borrowers incentives to perform.

Greater competition in banking is traditionally believed to aggravate banks' incentive to take excessive risks. This paper presents a model in which, contrary to the traditional view, an increase in competition can cause banks to behave more prudently: As competition intensifies and margins...

We develop an asset substitution framework to analyze the desirability of fair pricing of government guarantees for bank liabilities. We find that fair pricing of guarantees is desirable if and only if the banking sector is sufficiently transparent. In opaque banking systems, there is little...

Less-intense competition for deposits, by mitigating banks' incentive to take excessive risks, is traditionally believed to lead to lower non-performing loan (NPL) ratios and more-stable banks. This paper revisits this proposition in a model with borrower moral hazard in which banks' NPL ratios...

In imperfectly competitive credit markets, banks can face a tradeoff between exploiting their market power and enforcing hard budget constraints. As market power rises, banks eventually find it too costly to discipline underperforming borrowers by stopping their projects. Lending relationships...