The Role of Liquidity Standards in Optimal Lending of Last Resort Policies

38 Pages Posted: 7 Jan 2014

See all articles by João A. C. Santos

João A. C. Santos

Federal Reserve Bank of New York

Javier Suarez

Centre for Monetary and Financial Studies (CEMFI); Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Date Written: January 7, 2014

Abstract

We consider a model in which banks vulnerable to liquidity crises may receive support from the lender of last resort (LLR). Higher liquidity standards, though costly to banks, give the LLR more time to find out the systemic implications of denying support to the banks in trouble. By modifying banks’ prospects of being supported in a crisis, liquidity standards affect banks’ adoption of precautions against a crisis. We show that this effect is positive (negative) when banks are ex ante perceived to be systemically important (unimportant). We analyze the implications of these results for the design of liquidity standards and LLR policies.

Keywords: Liquidity standards, lender of last resort, constructive ambiguity

JEL Classification: G01, G21, G28

Suggested Citation

Santos, João A. C. and Suarez, Javier, The Role of Liquidity Standards in Optimal Lending of Last Resort Policies (January 7, 2014). Available at SSRN: https://ssrn.com/abstract=2375735 or http://dx.doi.org/10.2139/ssrn.2375735

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

Javier Suarez

Centre for Monetary and Financial Studies (CEMFI) ( email )

Casado del Alisal 5
28014 Madrid
Spain
+34 91 429 0551 (Phone)
+34 91 429 1056 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

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