The 2007 to 2009 financial crisis and the ongoing European debt crisis forcefully illustrate the severe and prolonged consequences that financial instability entails for the macroeconomy and society at large. The proposed research project uses a number of new data sets to explore testable hypotheses with respect to bank risk taking, interbank market stability, and systemic risk in the run-up to and during the financial crisis. The goal is to better understand the sources, channels, and consequences of frictions in the financial sector for financial (in)stability. Our analysis is structured around the following interrelated themes: A. Bank Compensation and Bank Risk Taking (Harald Hau) B. Interbank Markets (Angelo Ranaldo and Jan Wrampelmeyer) C. Financial Intermediation Frictions and Asset Prices (Norman Schürhoff) D. Systemic Risk and the Real Economy (Loriano Mancini)The research focus is empirical and based on combining various microeconomic data, e.g., on individual banks, bank employees, central banks, and institutional investors. The four research teams seek to use their institutional contacts to the Swiss National Bank, FINMA, BIS, Bundesbank, Federal Re-serve, SEC, and other regulatory entities and data aggregators for the best feasible data access. The common objective is to produce policy relevant research to guide future regulation. The project benefits from topical, methodological, and organizational synergies between the four research teams.