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Systemic banks and the lender of last resort

  • Jorge Ponce

    ()

    (Banco Central del Uruguay)

  • Marc Rennert

    (Deutsche Bundesbank and IAE Toulouse)

We 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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Paper provided by Department of Economics - dECON in its series Documentos de Trabajo (working papers) with number 1812.

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Length: 54 pages
Date of creation: Dec 2012
Date of revision:
Handle: RePEc:ude:wpaper:1812
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  1. Adam Copeland & Antoine Martin & Michael Walker, 2014. "Repo Runs: Evidence from the Tri-Party Repo Market," Journal of Finance, American Finance Association, vol. 69(6), pages 2343-2380, December.
  2. X. Freixas & B. Parigi & J-C. Rochet, 2000. "Systemic Risk, Interbank Relations and Liquidity Provision by theCentral Bank," DNB Staff Reports (discontinued) 47, Netherlands Central Bank.
  3. Fabio Castiglionesi & Wolf Wagner, 2012. "Turning Bagehot on His Head: Lending at Penalty Rates When Banks Can Become Insolvent," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(1), pages 201-219, 02.
  4. Kahn, Charles M. & Santos, Joao A. C., 2006. "Who Should Act as Lender of Last Resort? An Incomplete Contracts Model: A Comment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(4), pages 1111-1118, June.
  5. repec:imf:imfwpa:11/193 is not listed on IDEAS
  6. Ponce, Jorge, 2010. "Lender of last resort policy: What reforms are necessary?," Journal of Financial Intermediation, Elsevier, vol. 19(2), pages 188-206, April.
  7. Rochet, Jean-Charles, 2004. "Macroeconomic Shocks and Banking Supervision," IDEI Working Papers 276, Institut d'Économie Industrielle (IDEI), Toulouse.
  8. Jean-Charles Rochet & Jean Tirole, 1996. "Interbank lending and systemic risk," Proceedings, Board of Governors of the Federal Reserve System (U.S.), pages 733-765.
  9. Franklin Allen & Elena Carletti & Douglas Gale, 2009. "Interbank Market Liquidity and Central Bank Intervention," Economics Working Papers ECO2009/09, European University Institute.
  10. Viral V. Acharya & Tanju Yorulmazer, 2008. "Cash-in-the-Market Pricing and Optimal Resolution of Bank Failures," Review of Financial Studies, Society for Financial Studies, vol. 21(6), pages 2705-2742, November.
  11. Mathias Dewatripont & Jean Tirole, 1994. "The prudential regulation of banks," ULB Institutional Repository 2013/9539, ULB -- Universite Libre de Bruxelles.
  12. Xavier Freixas & José Jorge, 2008. "The Role of Interbank Markets in Monetary Policy: A Model with Rationing," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(6), pages 1151-1176, 09.
  13. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  14. Charles Goodhart, 1999. "Myths About the Lender of Last Resort," FMG Special Papers sp120, Financial Markets Group.
  15. Flannery, Mark J, 1996. "Financial Crises, Payment System Problems, and Discount Window Lending," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(4), pages 804-24, November.
  16. Repullo, R., 1999. "Who Should Act as Lender of Last Resort? An Incomplete Contracts Model," Papers 9913, Centro de Estudios Monetarios Y Financieros-.
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