Bank Runs, Lender of Last Resort, and Liquidity Regulation

Toni Ahnert, Kartik Anand and Guillem Ordonez-Calafi

No 21729, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: We study the liquidity choice of a bank subject to rollover risk and support from a lender of last resort (LLR) and study the consequences for bank stability, funding costs, and liquidity regulation. The liquidity choice balances forgoing profitable yet illiquid investment with fewer panic runs and cheaper debt. A higher LLR penalty rate increases bank liquidity and has a V-shaped effect on ex-ante bank stability. Turning to normative implications, the availability of the LLR reduces welfare for a large social cost of bank failure. The anticipation of ex-post support mitigates panic runs but induces lower bank liquidity ex ante, which increases funding costs and the frequency of bank failure. Liquidity regulation aligns private with social incentives and increases the social value of LLR support.

JEL-codes: G01 G21 G28 (search for similar items in EconPapers)
Date: 2026-07
References: Add references at CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP21729 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:21729

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP21729

Access Statistics for this paper

More papers in CEPR Discussion Papers from Centre for Economic Policy Research 33 Great Sutton Street, London EC1V 0DX, UK.
Bibliographic data for series maintained by CEPR ().