A Lender of Last Resort or a Securities Market as a Basis for Financial Development: The Case of the Anglo-Palestine Bank

Abstract

Under a stylized model, this paper investigates the relationships between commercial banks' asset management and the financial institutional structure. More specifically, we compare the effects of the existence of a market for short-term securities with those of a lender of last resort on the structure of banks' assets. We use historical data of the Anglo-Palestine Bank to simulate the results of our model. The conclusion is that the development of a financial market matters more for emerging economies than a lender of last resort since it eases the issuance of long-term loans that are necessary for economic growth.

Keywords: Financial markets, lender of last resort, liquidity risk

JEL Classification: G21, O16, N25