We analyze a general equilibrium model in which financial institutions generate endogenoussystemic risk. Banks optimally select correlated investments and thereby expose themselves tofire sale risk so as to sharpen their incentives. Systemic risk is therefore a natural consequence ofbanks’ fundamental role as delegated monitors. Our model sheds light on recent and historicaltrends in measured systemic risk. Technological innovations and government-directed lendingcan cause surges in systemic risk. Strict capital requirements and well-designed governmentasset purchase programs can combat systemic risk.