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Systemic banks and the lender of last resort

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  • Ponce, Jorge
  • Rennert, Marc

Abstract

We propose a model where systemic and non-systemic banks are exposed to liquidity shortfalls so that a lender of last resort policy is required. We find that it is socially optimal to override the decision of the central bank by the unconditional provision of liquidity support when the shortfall is large enough, i.e. in crisis times. 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 systemic risk on the optimal allocation of the lender of last resort responsibilities for systemic banks depends on the relative size of counteracting effects.

Suggested Citation

  • Ponce, Jorge & Rennert, Marc, 2015. "Systemic banks and the lender of last resort," Journal of Banking & Finance, Elsevier, vol. 50(C), pages 286-297.
  • Handle: RePEc:eee:jbfina:v:50:y:2015:i:c:p:286-297
    DOI: 10.1016/j.jbankfin.2014.01.002
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    References listed on IDEAS

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    Cited by:

    1. 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.
    2. Gary Gorton & Guillermo Ordoñez, 2016. "Fighting Crises," NBER Working Papers 22787, National Bureau of Economic Research, Inc.

    More about this item

    Keywords

    Systemic banks; Lender of last resort policy; Optimal regulatory architecture;

    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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