This paper presents a model of soft budget constraints (SBC) in a bank lending relationship, emphasizing the role of institutions in shaping the SBC phenomena. The model allows two types of SBC to emerge according to specific constellations of parameters: the SBC as a dynamic commitment problem...

This paper uses a formal model of a bank supervisor to derive policy implications on the optimal institutional arrangements for effective banking supervision. I find that bank supervisors should have political independence, and that independence should be complemented by legal protection and...