Emergency liquidity injections

Nicholas Garvin

International Review of Economics & Finance, 2024, vol. 89, issue PA, 1496-1513

Abstract: This paper models emergency liquidity injection policies intended to prevent illiquidity-driven bank failures. A system-wide withdrawal of funding liquidity causes bank failures if banks’ securities have low market liquidity relative to the withdrawal size. The model presents several policy implications. Requiring banks to collateralise emergency lending with illiquid securities has positive externalities in the securities’ secondary markets, by constraining banks’ fire selling. For penalty rates on emergency lending to credibly mitigate moral hazard, the loans should be long term, due after the liquidity distress subsides. Additional policy implications relate to penalty rates, haircuts and government balance-sheet expansion.

Keywords: Bailout; Banking crisis; Collateral; Liquidity; Moral hazard (search for similar items in EconPapers)
JEL-codes: E52 E58 G01 G12 G21 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1059056023003374
Full text for ScienceDirect subscribers only

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:eee:reveco:v:89:y:2024:i:pa:p:1496-1513

DOI: 10.1016/j.iref.2023.08.016

Access Statistics for this article

International Review of Economics & Finance is currently edited by H. Beladi and C. Chen

More articles in International Review of Economics & Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().