Who Should Act as Lender of Last Resort? An Incomplete Contracts Model

Rafael Repullo

Journal of Money, Credit and Banking, 2000, vol. 32, issue 3, 580-605

Abstract: This paper presents a model of a bank subject to liquidity shocks that require borrowing from a lender of last resort. Two government agencies may perform this function: a central bank and a deposit insurance corporation. The agencies share supervisory information, which provides a nonverifiable signal of the bank's financial condition, and use it to decide whether to support it. It is shown that the optimal institutional design involves the two agencies: the central bank dealing with small liquidity shocks, and the deposit insurance corporation with large shocks. Furthermore, except for very small shocks, they should lend at penalty rates.

Date: 2000
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Journal Article: Who should act as lender of last resort? an incomplete contracts model (2000)
Working Paper: Who Should Act as a Lender of Last Resort? An Incomplete Contracts Model (1999)
Working Paper: Who Should Act as Lender of Last Resort? An Incomplete Contracts Model (1999)
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Persistent link: https://EconPapers.repec.org/RePEc:mcb:jmoncb:v:32:y:2000:i:3:p:580-605

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