Liquidity, Risk Taking, and the Lender of Last Resort

Rafael Repullo

MPRA Paper from University Library of Munich, Germany

Abstract: This paper studies the strategic interaction between a bank whose deposits are randomly withdrawn and a lender of last resort (LLR) that bases its decision on supervisory information on the quality of the bank’s assets. The bank is subject to a capital requirement and chooses the liquidity buffer that it wants to hold and the risk of its loan portfolio. The equilibrium choice of risk is shown to be decreasing in the capital requirement and increasing in the interest rate charged by the LLR. Moreover, when the LLR does not charge penalty rates, the bank chooses the same level of risk and a smaller liquidity buffer than in the absence of an LLR. Thus, in contrast with the general view, the existence of an LLR does not increase the incentives to take risk, while penalty rates do.

JEL-codes: G0 G00 (search for similar items in EconPapers)
Date: 2005-02-28
New Economics Papers: this item is included in nep-ban, nep-cfn and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (73)

Published in International Journal of Central Banking Number 2.Volume(2005): pp. 47-80

Downloads: (external link)
https://mpra.ub.uni-muenchen.de/826/1/MPRA_paper_826.pdf original version (application/pdf)

Related works:
Journal Article: Liquidity, Risk Taking, and the Lender of Last Resort (2005)
Working Paper: Liquidity, Risk-Taking, and the Lender of Last Resort (2005)
Working Paper: Liquidity, Risk-Taking and the Lender of Last Resort (2005)
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:826

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 ().