- micro-prudential regulation •
- Macro-Prudential Regulation •
- market discipline •
- contagion •
- lender of last resort •
- bailout •
- capital requirements
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 probability of inefficient bank liquidation.