LOLR policies, banks’ borrowing capacities and funding structures

Stefano Corradin and Suresh Sundaresan

No 2738, Working Paper Series from European Central Bank

Abstract: We develop a dynamic model of a bank which finances its asset portfolio by rolling over short-term deposits with access to LOLR liquidity. Bank faces frictions in equity issuance and loan portfolio adjustments. We calibrate our model with bank’s estimated borrowing capacity at the LOLR and funding profile. We show that rollover of debt combined with access to LOLR results in a wealth transfer from private creditors to equity holders through increased dividend payments in good states, coupled with more risk-taking and defaults in bad states. The effects are stronger for banks with more fragile funding and higher maturity intermediation. JEL Classification: E58, G21, G32, G33, G35

Keywords: lender of last resort; liquidatio; risk-taking; rollover risk; short-term debt financing; financing frictions (search for similar items in EconPapers)
Date: 2022-10
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec, nep-ifn and nep-mon
Note: 1103497
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20222738

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