We develop a theory of optimal bank leverage in which the benefit of debt in inducing
loan monitoring is balanced against the benefit of equity in attenuating risk-shifting.
However, faced with socially-costly correlated bank failures, regulators bail out creditors.
Anticipation of this generates multiple equilibria, including one with systemic risk in which
banks use excessive leverage to fund correlated, inefficiently risky loans. Limiting leverage and resolving both moral hazards?insufficient loan monitoring and asset substitution?requires a novel two-tiered capital requirement, including a ?special capital account? that is unavailable to creditors upon failure.
The fall of fascism in Italy in 1943-1944 was followed by the issuance of laws and decrees that made former fascist politicians ineligible for political...
Under the New Deal framework for money and payments—which had its roots in the National Bank Act of 1864—banks in the United States were governed in...