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

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  • Repullo, R.

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 with different objectives may perform this function: a central bank and a deposit insurance corporation. Both agencies supervise the bank, i.e. collect nonverifiable information about its financial condition, and use this information to decide whether to support it. It is shown that the optimal institutional design involves the two agencies: the central bank being responsible for dealing with small liquidity shocks, and the deposit insurance corporation for large shocks. Furthermore, except for very small shocks, they should lend at penalty rates.

Suggested Citation

  • Repullo, R., 1999. "Who Should Act as Lender of Last Resort? An Incomplete Contracts Model," Papers 9913, Centro de Estudios Monetarios Y Financieros-.
    • Handle: RePEc:fth:cemfdt:9913
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    References listed on IDEAS

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    1. Joe Peek & Eric S. Rosengren & Geoffrey M. B. Tootell, 1999. "Is Bank Supervision Central to Central Banking?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 114(2), pages 629-653.
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    More about this item

    Keywords

    BANKS ; CENTRAL BANKS ; CONTRACTS ; INSURANCE;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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