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We are grateful for comments from Marcus Brunnermeier and from the handbook editors 1 An example of such a DSGE extension is Meh and Moran [2010] who generalise the financial accelerator to include a bank-moral hazard based on Holmstrom and Tirole [1997].

Making use of a structural model that allows for optimal liquidity management, we study the role that repos play in a banks financing structure. In our model the banks assets consist of illiquid loans and liquid reserves and are financed by a combination of repos, long-term debt, deposits and equity. Repos are a cheap source of funding, but they are subject to an exogenous rollover risk. We show that the use of repos inflicts two types of indirect ("shadow") costs on the banks shareholders: first, it induces the bank to maintain higher liquid reserves in order to alleviate the additional default risk; second, it adds to the cost of long-term debt financing. These shadow costs limit the banks appetite for cheap but unstable repo funding. This effect is, however, weakened under poor returns on risky assets, access to deposit funding and the depositor preference rule. We also analyze the impact of a liquidity coverage ratio, payout restrictions and a leverage ratio on the banks financing choices and show that all these tools are able to curb the banks reliance on repos.

We develop a continuous-time general-equilibrium model to rationalise the dynamics of insurance prices in a competitive insurance market with financial frictions. Insurance companies choose underwriting and financing policies to maximise shareholder value. The equilibrium price dynamics are explicit, which allows simple numerical simulations and generates testable implications. In particular, we find that the equilibrium price of insurance is (weakly) predictable and the insurance sector always realises positive expected profits. Moreover, rather than true cycles, insurance prices exhibit asymmetric reversals caused by the reflection of the aggregate capacity process at the dividend and recapitalisation boundaries. AbstractWe develop a continuous-time general-equilibrium model to rationalize the dynamics of insurance prices in a competitive insurance market with nancial frictions. Insurance companies choose underwriting and nancing policies to maximize shareholder value. The equilibrium price dynamics is explicit, which allows simple numerical simulations and generates testable implications. In particular, we nd that the equilibrium price of insurance is (weakly) predictable and the insurance sector always realizes positive expected prots. Moreover, rather than true cycles, insurance prices exhibit asymmetric reversals caused by the reection of the aggregate capacity process at the dividend and recapitalization boundaries.