Date of Original Version

4-23-2012

Type

Working Paper

Rights Management

All Rights Reserved

Abstract or Description

I analyze the causes of financial crises and policies designed to mitigate their effects. I provide new evidence that the capital structure of financial institutions is significantly more illiquid than that of non-financial businesses. I develop a theory in which such differences in capital structure arise from the differences in information lenders have about the assets of financial and non-financial businesses. I use the theory to show that the illiquid capital structure used by financial institutions leads such institutions to be inherently fragile and that government interventions during a crisis, such as bailouts, are not desirable.

Included in

Economics Commons

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