The views expressed in this paper are those of the authors, and not necessarily those of the Bank
of England. The authors are grateful to Mark Flannery, Xavier Freixas, Douglas Gale, Denis
Gromb, Charles Kahn, Jose Liberti, Robert Marquez, Enrico Perotti, Rafael Repullo, Hyun Shin,
Raghu Sundaram, Lucy White, Andrew Winton, two anonymous referees for the Bank of England
Working Paper Series for useful suggestions. The authors wish to thank Prasanna Gai, Celine
Gondat-Larralde, Andrew Gracie, Glenn Hoggarth, Erlend Nier, Spyros Pagratis, Lea Zicchino
and the seminar participants at the Bank of England, LBS, Cass Business School, Judge Institute
of Management at Cambridge, University of Vienna, FS Framework Group at the Bank of
England, Norwegian School of Management and University of Amsterdam, and participants of the
Financial Fragility and Bank Regulation Conference at Bank of Portugal and the BCBS-CEPR-JFI
Workshop on Risk Management and Regulation in Banking. All errors remain our own. This
paper was nalised on 15 May 2007.