Abstract

http://ssrn.com/abstract=827366
 
 

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Insuring Banks against Liquidity Shocks: The Role of Deposit Insurance and Lending of Last Resort


João A. C. Santos


Federal Reserve Bank of New York


Journal of Economic Surveys, Vol. 20, No. 3, pp. 459-482, 2006

Abstract:     
It has long been recognised that banks' simultaneous provision of monitoring and liquidity services is advantageous, but leaves them susceptible to liquidity shocks that may culminate in a system failure. Because a system failure is costly, this provides a rationale for adopting arrangements, including a lender of last resort and deposit insurance, to insure banks against liquidity shocks. These arrangements have proven themselves very successful, but they have also been the source of problems. Researchers have identified some of the main sources of these problems and have suggested ways to improve the design of these arrangements, but there are still many issues that remain unaddressed. This paper reviews the literature on the two arrangements that most countries have adopted to insure banks against liquidity shocks, a lender of last resort and deposit insurance, and compares the design of these arrangements across countries. The paper ends with a brief summary of the key lessons learned about the design of these arrangements and the issues related to them that remain unaddressed.

Keywords: Banks, central bank, lending of last resort, deposit insurance

JEL Classification: G21, G28

Accepted Paper Series





Not Available For Download

Date posted: October 28, 2005  

Suggested Citation

Santos, João A. C., Insuring Banks against Liquidity Shocks: The Role of Deposit Insurance and Lending of Last Resort. Journal of Economic Surveys, Vol. 20, No. 3, pp. 459-482, 2006. Available at SSRN: http://ssrn.com/abstract=827366

Contact Information

João A. C. Santos (Contact Author)
Federal Reserve Bank of New York ( email )
33 Liberty Street
New York, NY 10045
United States
212-720-5583 (Phone)
212-720-8363 (Fax)
HOME PAGE: HTTP://WWW.NEWYORKFED.ORG/RMAGHOME/ECONOMIST/SANTOS/CONTACT.HTML
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