We consider a model in which the threat of bank liquidations by creditors as well as equity-based compensation incentives both discipline bankers, but with different consequences. Greater use of equity leads to lower ex ante bank liquidity, whereas greater use of debt leads to a higher...

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,”...