Banking Crises and the Lender of Last Resort: How crucial is the role of information?

Hassan Naqvi
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Hassan Naqvi: NUS Business School, & Financial Markets Group, LSE
Authors registered in the RePEc Author Service: Hassan Naqvi () and Hassan Raza Naqvi

Finance from EconWPA

Abstract: This article develops a model of bank runs and crises and analyses how the presence of a lender of last resort (LOLR) affects the solvency of the banking system. We obtain a one to one mapping from the depositors' equilibrium strategy to an optimal contract prevailing in the economy. The study finds that the difference between a perfectly informed and an imperfectly informed LOLR can be crucial. Our results indicate that a perfectly informed LOLR is a Pareto improvement. However, if the supervisory process of the LOLR is subject to noise, then the gains from ex post efficiency may be outweighed by ex ante inefficiency induced by moral hazard which is conducive to lower lending rates in the economy.

Keywords: Bank runs; lender of last resort; transparency (search for similar items in EconPapers)
JEL-codes: E58 G21 G28 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mon
Date: 2004-10-14
Note: Type of Document - pdf; pages: 40
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Persistent link: http://EconPapers.repec.org/RePEc:wpa:wuwpfi:0410009

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