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Insuring Banks Against Liquidity Shocks: The Role of Deposit Insurance and Lending of Last Resort

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  • Jo�o A. C. Santos

Abstract

It has long been recognized that banks' simultaneous provision of monitoring and liquidity services is advantageous but leaves them susceptible to liquidity shocks that may culminate in a system failure. Because a system failure is costly, this provides a rationale for adopting arrangements, including a lender of last resort and deposit insurance (DI), to insure banks against liquidity shocks. These arrangements have proven themselves very successful, but they have also been the source of problems. Researchers have identified some of the main sources of these problems and have suggested ways to improve the design of these arrangements, but there are still many issues that remain unaddressed. This paper reviews the literature on the two arrangements that most countries have adopted to insure banks against liquidity shocks, a lender of last resort and DI, and compares the design of these arrangements across countries. The paper ends with a brief summary of the key lessons learned about the design of these arrangements and the issues related to them that remain unaddressed. Copyright Blackwell Publishers Ltd, 2006.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Journal of Economic Surveys.

Volume (Year): 20 (2006)
Issue (Month): 3 (07)
Pages: 459-482

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Handle: RePEc:bla:jecsur:v:20:y:2006:i:3:p:459-482

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Cited by:
  1. Inês Drumond, 2008. "Bank Capital Requirements, Business Cycle Fluctuations and the Basel Accords: A Synthesis," FEP Working Papers 277, Universidade do Porto, Faculdade de Economia do Porto.
  2. Xavier Freixas, 2009. "Monetary policy in a systemic crisis," Economics Working Papers 1200, Department of Economics and Business, Universitat Pompeu Fabra.
  3. Cordelius Ilgmann & Ulrich van Suntum, . "Bad Banks: The Case of Germany," Working Papers 200110, Institute of Spatial and Housing Economics, Munster Universitary.
  4. Pilar Gómez-Fernández-Aguado & Antonio Partal-Ureña & Antonio Trujillo-Ponce, 2013. "Evaluating the effects of the EU directive proposal for risk-based deposit insurance premiums in Spain," Working Papers 13.01, Universidad Pablo de Olavide, Department of Financial Economics and Accounting (former Department of Business Administration).
  5. Ewerhart, C. & Valla, N., 2007. "Financial Market Liquidity and the Lender of Last Resort," Working papers 178, Banque de France.
  6. Ponce, Jorge, 2010. "Lender of last resort policy: What reforms are necessary?," Journal of Financial Intermediation, Elsevier, vol. 19(2), pages 188-206, April.
  7. Xavier Freixas & Bruno Maria Parigi, 2008. "Lender of Last Resort and Bank Closure Policy," CESifo Working Paper Series 2286, CESifo Group Munich.

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