Liquidity provision vs. deposit insurance: preventing bank panics without moral hazard

Antoine Martin

Economic Theory, 2006, vol. 28, issue 1, 197-211

Abstract: In this paper I ask whether a central bank policy of providing liquidity to banks during panics can prevent bank runs without causing moral hazard. This kind of policy has been widely advocated, most notably by Bagehot (1873). I show a particular central bank liquidity provision policy can prevent bank panics without moral hazard problems. I also show that a deposit insurance policy, while preventing runs, can create moral hazard problems. Copyright Springer-Verlag Berlin/Heidelberg 2006

Keywords: Bank panics; Liquidity provision; Deposit insurance; Moral hazard. (search for similar items in EconPapers)
Date: 2006
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Working Paper: Liquidity provision vs. deposit insurance: preventing bank panics without moral hazard? (2001)
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DOI: 10.1007/s00199-005-0613-x

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