Systemic banks and the lender of last resort
AbstractWe 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.
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Bibliographic InfoPaper provided by Department of Economics - dECON in its series Documentos de Trabajo (working papers) with number 1812.
Length: 54 pages
Date of creation: Dec 2012
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Systemic banks; systemic risk; lender of last resort policy;
Find related papers by 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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