This paper develops a theory that explains why financial crises follow profitable lending booms. When agents exhibit the "availability heuristic" and there is a long period of banking profitability, all agents — banks, their investors and regulators — end up in an “availability cascade,”...

In this paper I develop a model of a competitive financial system with unrestricted but costly entry and an endogenously determined number of competing financial institutions (“banks” for short). Banks can make standard loans on which plentiful historical data are available and unanimous...