This paper analyzes the mechanisms behind collective moral hazard, maturity mismatch, and systemic bailouts. It shows how private leverage choices exhibit strategic complementarities through the reaction of monetary policy. When everyone engages in maturity transformation, authorities have little choice but to facilitate refinancing. Refusing to adopt a risky balance sheet lowers the return on equity. The key ingredient is that monetary policy is non-targeted. The ex post benefits from a monetary bailout accrue in proportion to the number of leverage, while the distortion costs are to a large extent fixed. This insight has important consequences. First, banks choose to correlate their risk exposures. Second, private borrowers may deliberately choose to increase their interest-rate sensitivity following bad news about future needs for liquidity. Third, optimal monetary policy is time inconsistent. Fourth, there is a role for macro-prudential supervision. The paper characterizes the optimal regulation, which takes the form of a minimum liquidity requirement coupled with monitoring of the quality of liquid assets. It establishes the robustness of these insights when the set of bailout instruments is endogenous and characterizes the structure of optimal bailouts. The paper argues that the wide-scale transformation is closely related to the unprecedented intervention by Central Banks and Treasuries. By March 2009, the Fed alone had seen its balance sheet triple in size (to 2.7 trillion) relative to 2007. The bailout is both monetary (nominal interest rates nearing 0) and fiscal; the latter category covers support to institutions (underpriced deposit insurance, purchase of commercial paper, recapitalizations) and support to asset prices (as planned in TARP I and II). The paper develops a simple framework that captures and builds on these insights. Corporate entities (called "banks") choose whether to hoard liquid instruments in order to meet potential liquidity needs. In the basic model, liquidity shocks are correlated, and so there is macroeconomic uncertainty. Maturity transformation is intense in the economy when numerous institutions fail to hoard liquidity. In case of an aggregate shock, authorities can lower the interest rate in order to facilitate troubled institutions' refinancing; for example, a 1% interest rate cuts the cost of capital by 75% relative to a 4% rate and can keep a number of highly mismatched institutions afloat. The monetary transmission mechanism in our economy is therefore in line with the "credit channel" of monetary policy. Low interest rates entail a wedge between marginal rates of transformation and substitution and therefore creates a distortion in the economy. This distortion is akin to a fixed cost, which is worth incurring only if the size of the troubled sector is large enough. Furthermore, low interest rates transfer resources from consumers to banks with refinancing needs. Focusing on monetary policy, the paper obtains the following insights: excessive maturity transformation. The central bank tends to supply too much liquidity in the time-consistent outcome. Our theory therefore brings support to the view that authoritiesThis paper analyzes the mechanisms behind collective moral hazard, maturity mismatch, and systemic bailouts. It shows how private leverage choices exhibit strategic complementarities through the reaction of monetary policy. When everyone engages in maturity transformation, authorities have little choice but to facilitate refinancing. Refusing to adopt a risky balance sheet lowers the return on equity. The key ingredient is that monetary policy is non-targeted. The ex post benefits from a monetary bailout accrue in proportion to the number of leverage, while the distortion costs are to a large extent fixed. This insight has important consequences. First, banks choose to correlate their risk exposures. Second, private borrowers may deliberately choose to increase their interest-rate sensitivity following bad news about future needs for liquidity. Third, optimal monetary policy is time inconsistent. Fourth, there is a role for macro-prudential supervision. The paper characterizes the optimal regulation, which takes the form of a minimum liquidity requirement coupled with monitoring of the quality of liquid assets. It establishes the robustness of these insights when the set of bailout instruments is endogenous and characterizes the structure of optimal bailouts. The paper argues that the wide-scale transformation is closely related to the unprecedented intervention by Central Banks and Treasuries. By March 2009, the Fed alone had seen its balance sheet triple in size (to 2.7 trillion) relative to 2007. The bailout is both monetary (nominal interest rates nearing 0) and fiscal; the latter category covers support to institutions (underpriced deposit insurance, purchase of commercial paper, recapitalizations) and support to asset prices (as planned in TARP I and II). The paper develops a simple framework that captures and builds on these insights. Corporate entities (called "banks") choose whether to hoard liquid instruments in order to meet potential liquidity needs. In the basic model, liquidity shocks are correlated, and so there is macroeconomic uncertainty. Maturity transformation is intense in the economy when numerous institutions fail to hoard liquidity. In case of an aggregate shock, authorities can lower the interest rate in order to facilitate troubled institutions' refinancing; for example, a 1% interest rate cuts the cost of capital by 75% relative to a 4% rate and can keep a number of highly mismatched institutions afloat. The monetary transmission mechanism in our economy is therefore in line with the "credit channel" of monetary policy. Low interest rates entail a wedge between marginal rates of transformation and substitution and therefore creates a distortion in the economy. This distortion is akin to a fixed cost, which is worth incurring only if the size of the troubled sector is large enough. Furthermore, low interest rates transfer resources from consumers to banks with refinancing needs. Focusing on monetary policy, the paper obtains the following insights: excessive maturity transformation. The central bank tends to supply too much liquidity in the time-consistent outcome. Our theory therefore brings support to the view that authorities