Pitfalls and Optimal Design of Emergency Liquidity Assistance

Linda Schilling

MPRA Paper from University Library of Munich, Germany

Abstract: This paper studies why lender-of-last-resort support can fail to stop bank runs. In a nominal bank-run model with equity and multiple banks, I show that delayed Emergency Liquidity Assistance (ELA) shifts losses onto patient depositors and can trigger panic-driven withdrawals, even with sound assets and unlimited central-bank liquidity. The mechanism is a crisis-contingent, economy-wide inflation tax that insures early withdrawals while taxing those who stay, and redistributes resources across banks through the price level. The results highlight that ELA timing and fiscal design are critical for stability and can make regulatory interventions destabilizing rather than stabilizing.

Keywords: Lender of Last Resort; Emergency Liquidity Assistance; financial regu- lation; bank runs; policy effectiveness; bank resolution (search for similar items in EconPapers)
JEL-codes: E50 G3 G33 G38 (search for similar items in EconPapers)
Date: 2026-02-27
References: Add references at CitEc
Citations:

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/128236/1/MPRA_paper_128236.pdf original version (application/pdf)

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:pra:mprapa:128236

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().