Banks are typically exposed to spirals between liquidity scarcity and solvency risk. We build a network model of optimizing banks featuring contagion on both sides of balance sheets: runs on short term liabilities and banks’ liquidity hoarding induce liquidity freezes; fire sale externalities and interconnected debt defaults produce asset risk. We use the model, which is calibrated to European data via simulated method of moments, to study the effects of phase-in increases of liquidity coverage ratios. Interestingly we find that the systemic risk profile of the system is not improved and might even deteriorate. Based on those insights we propose an alternative approach: differential (across banks) application of coverage ratios based on a systemic importance ranking help to mitigate the externalities and deliver a much more stable system.

We present causal evidence on the effect of boardroom networks on firm value. We exploit a ban on interlocking directorates of Italian financial and insurance companies as exogenous variation and show that firms that lose centrality in the network experience negative abnormal returns around the announcement date. The key driver of our results is the role of boardroom connections in reducing asymmetric information. We find stronger effects for firms with fewer business partners and less experienced directors. Finally, we show that network centrality has a positive effect on directors’ compensation, providing evidence of rent sharing, and liquidity.