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Systemic banks and the lender of last resort

Author

Listed:
  • Jorge Ponce

    (Banco Central del Uruguay)

  • Marc Rennert

    (Deutsche Bundesbank and IAE Toulouse)

Abstract

We propose a model whereby systemic and non-systemic banks are exposed to liquidity shortfalls such that a lender of last resort policy is required. We analyze the optimal allocation of lender of last resort responsibilities and find that it is socially optimal to move responsibilities from the central bank to an unconditional bailout rule when the shortfall is large enough. The existence of systemic banks provides a rationale for the central bank to act as lender of last resort for non-systemic banks in a larger range of their liquidity shortfalls. However, the impact of considering systemic risk on the optimal allocation of the lender of last resort responsibilities for systemic banks is ambiguous.

Suggested Citation

  • Jorge Ponce & Marc Rennert, 2012. "Systemic banks and the lender of last resort," Documentos de trabajo 2012004, Banco Central del Uruguay.
    • Handle: RePEc:bku:doctra:2012004
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    References listed on IDEAS

    as
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    1. Gary Gorton & Guillermo Ordoñez, 2020. "Fighting Crises with Secrecy," American Economic Journal: Macroeconomics, American Economic Association, vol. 12(4), pages 218-245, October.
    2. Gary B. Gorton & Guillermo L. Ordoñez, 2014. "How Central Banks End Crises," PIER Working Paper Archive 14-025, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    3. Gary Gorton & Guillermo Ordoñez, 2016. "Fighting Crises," NBER Working Papers 22787, National Bureau of Economic Research, Inc.

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    More about this item

    Keywords

    systemic banks; systemic risk; lender of last resort policy;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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