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Pitfalls and Optimal Design of Emergency Liquidity Assistance

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  • Schilling, Linda

Abstract

This paper examines the unintended consequences of Emergency Liquidity Assistance (ELA) in preventing bank runs. It shows that late ELA interventions, even when generous, can fail to restore confidence and may instead trigger withdrawals. The key mechanism is a redistribution of repayment burdens from early withdrawers to remaining depositors, which undermines ex-ante incentives to stay. Without credible deposit insurance, this financing structure can make ELA destabilizing rather than stabilizing. The findings highlight that poorly designed interventions may backfire, suggesting that timing and fiscal backing are crucial to the effectiveness of lender-of-last-resort policies.

Suggested Citation

  • Schilling, Linda, 2025. "Pitfalls and Optimal Design of Emergency Liquidity Assistance," CEPR Discussion Papers 20202, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:20202
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    File URL: https://cepr.org/publications/DP20202
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    More about this item

    JEL classification:

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

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