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Liquidity provision vs. deposit insurance: preventing bank panics without moral hazard

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  • Antoine Martin

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Abstract

In this paper I ask whether a central bank policy of providing liquidity to banks during panics can prevent bank runs without causing moral hazard. This kind of policy has been widely advocated, most notably by Bagehot (1873). I show a particular central bank liquidity provision policy can prevent bank panics without moral hazard problems. I also show that a deposit insurance policy, while preventing runs, can create moral hazard problems. Copyright Springer-Verlag Berlin/Heidelberg 2006

Suggested Citation

  • Antoine Martin, 2006. "Liquidity provision vs. deposit insurance: preventing bank panics without moral hazard," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 28(1), pages 197-211, May.
  • Handle: RePEc:spr:joecth:v:28:y:2006:i:1:p:197-211
    DOI: 10.1007/s00199-005-0613-x
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    References listed on IDEAS

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