Emergency liquidity provision to public banks: Rules versus discretion

Achim Hauck () and Uwe Vollmer

European Journal of Political Economy, 2013, vol. 32, issue C, 193-204

Abstract: This paper analyzes a government's incentives to provide financial assistance to a public bank which is hit by a liquidity shock. We show that discretionary decisions about emergency liquidity assistance result in either excessively small or excessively large liquidity injections in a wide variety of circumstances. Also, adding a lender of last resort does not generally ensure a socially optimal policy. However, optimal rules exist that align the preferences of the government and/or a lender of last resort with social preferences by either subsidizing or taxing liquidity aid.

Keywords: Public banking; Liquidity crises; Lender of last resort; Central bank; Deposit insurance; Forbearance (search for similar items in EconPapers)
JEL-codes: G21 G28 L32 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:poleco:v:32:y:2013:i:c:p:193-204

DOI: 10.1016/j.ejpoleco.2013.07.004

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