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Financial Market Liquidity and the Lender of Last Resort

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  • Ewerhart, C.
  • Valla, N.

Abstract

It has been argued in the literature that emergency liquidity injections should be conducted preferably in the form of open market operations. As we show in the present paper, this is not necessarily the case when liquidity may be alternatively used for speculative purposes during the crisis. In such a situation, non-discriminating operations may attract unfunded market participants that divert funding resources away from its best uses in the financial sector. As a consequence, targeted liquidity assistance may become strictly superior. The analysis might have a bearing on recent developments in the context of the subprime crisis.

Suggested Citation

  • Ewerhart, C. & Valla, N., 2007. "Financial Market Liquidity and the Lender of Last Resort," Working papers 178, Banque de France.
    • Handle: RePEc:bfr:banfra:178
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    References listed on IDEAS

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    1. Goodhart, Charles A.E. & Huang, Haizhou, 2005. "The lender of last resort," Journal of Banking & Finance, Elsevier, vol. 29(5), pages 1059-1082, May.
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    8. Flannery, Mark J, 1996. "Financial Crises, Payment System Problems, and Discount Window Lending," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(4), pages 804-824, November.
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    1. repec:prg:jnlpep:v:preprint:id:529 is not listed on IDEAS
    2. Pavla Vodová, 2015. "To Lend or to Borrow on the Interbank Market: What Matters for Commercial Banks in the Visegrad Countries," Prague Economic Papers, Prague University of Economics and Business, vol. 2015(6), pages 662-677.
    3. Sekoni, Abiola, 2015. "Germane Issues and Physiognomies of Bank Liquidity Risk," MPRA Paper 67399, University Library of Munich, Germany.
    4. Nikolaou, Kleopatra, 2009. "Liquidity (risk) concepts: definitions and interactions," Working Paper Series 1008, European Central Bank.

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    More about this item

    Keywords

    Liquidity ; Financial markets ; Lender of last resort.;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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