IDEAS home Printed from https://ideas.repec.org/p/bof/bofrdp/2001_001.html
   My bibliography  Save this paper

An assessment of alternative lender of last resort schemes

Author

Listed:
  • Herrala, Risto

Abstract

We sketch a theoretical framework for comparing the properties of funded LOLR schemes.We construct an idealized lender of last resort and investigate how it formulates policy under alternative public and private governance structures.The alternatives are a (first-best) social utility maximizer that can dictate participation, and three voluntary schemes: a public lender of last resort, a mutual clearing house that formulates policy by voting, and a profit maximizing private LOLR scheme.We compare the policies formulated by these institutions from the viewpoint of social desirability.Our model targets the debate on free banking, in particular the issue of whether private institutions would fare well as lenders of last resort.In our model, the first-best LOLR scheme always covers the whole banking sector and offers full insurance to the participants.We find that voluntary schemes succeed relatively well as lenders of last resort in situations where recipients of LOLR assistance can repay LOLR loans with interest.In this case, the LOLR can use interest rate policy to make the scheme attractive to banks of every quality and thus create incentives for comprehensive entry.In private schemes, policy tends to be distorted if the private scheme is the only possible scheme.However, competitive forces lead private institutions to approach the first-best outcome, which is the only contestable outcome.The end result changes when we investigate a situation in which banks' ability to repay LOLR loans is limited. When lending is associated with losses for the LOLR, good quality banks will tend to stay out of the LOLR scheme and participation in voluntary schemes will always fall short of the first-best outcome. A compulsory scheme (such as a central bank that can impose a reserve requirement on banks) has an advantage over voluntary schemes.Key words: liquidity, lender of last resort, banking, central banking, governance

Suggested Citation

  • Herrala, Risto, 2001. "An assessment of alternative lender of last resort schemes," Research Discussion Papers 1/2001, Bank of Finland.
  • Handle: RePEc:bof:bofrdp:2001_001
    as

    Download full text from publisher

    File URL: https://helda.helsinki.fi/bof/bitstream/123456789/7641/1/98059.pdf
    Download Restriction: no

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Beatrice D. Scheubel & Livio Stracca, 2016. "What Do We Know About the Global Financial Safety Net? A New Comprehensive Data Set," CESifo Working Paper Series 6184, CESifo Group Munich.
    2. Korhonen, Tapio, 2001. "Finnish monetary and foreign exchange policy and the changeover to the euro," Research Discussion Papers 25/2001, Bank of Finland.
    3. Arnoldo LOpez Marmolejo & Fabrizio Lopez-Gallo, 2010. "Public and Private Liquidity Providers," Working Papers 1015, BBVA Bank, Economic Research Department.
    4. Stracca, Livio & Scheubel, Beatrice, 2016. "What do we know about the global financial safety net? Rationale, data and possible evolution," Occasional Paper Series 177, European Central Bank.
    5. Saarenheimo, Tuomas, 2001. "Should unemployment benefits decrease as the unemployment spell lengthens?," Research Discussion Papers 23/2001, Bank of Finland.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bof:bofrdp:2001_001. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Minna Nyman). General contact details of provider: http://edirc.repec.org/data/bofgvfi.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.