Emergency Liquidity Provision to Public Banks: Rules Versus Discretion

24 Pages Posted: 10 Jul 2012

See all articles by Achim Hauck

Achim Hauck

University of Portsmouth

Uwe Vollmer

University of Leipzig

Date Written: April 10, 2012

Abstract

This paper analyzes a government's incentives to provide fi nancial assistance to a public bank which is hit by a liquidity shock. We show that discretionary decisions about emergency liquidity assistance result in either excessively small or excessively large liquidity injections in a wide variety of circumstances. Also, adding a lender of last resort does not generally ensure a socially optimal policy. However, optimal rules exist that align the government's preferences with social preferences by either subsidizing or taxing liquidity aid.

Keywords: Public banking, liquidity crises, lender of last resort, central bank, deposit insurance, forbearance

JEL Classification: G21, G28, L32

Suggested Citation

Hauck, Achim and Vollmer, Uwe, Emergency Liquidity Provision to Public Banks: Rules Versus Discretion (April 10, 2012). Available at SSRN: https://ssrn.com/abstract=2103165 or http://dx.doi.org/10.2139/ssrn.2103165

Achim Hauck (Contact Author)

University of Portsmouth ( email )

Portsmouth Business School
Portsmouth
United Kingdom

HOME PAGE: http://www.port.ac.uk/economics-and-finance/staff/achim-hauck.html

Uwe Vollmer

University of Leipzig ( email )

Marschnerstrasse 31
D-04109 Leipzig, 04109
Germany

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