Browsing by Subject "lender of last resort"

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  • Herrala, Risto (2001)
    Suomen Pankin keskustelualoitteita 1/2001
    We sketch a theoretical framework for comparing the properties of funded LOLR schemes.We construct an idealized lender of last resort and investigate how it formulates policy under alternative public and private governance structures.The alternatives are a (first-best) social utility maximizer that can dictate participation, and three voluntary schemes: a public lender of last resort, a mutual clearing house that formulates policy by voting, and a profit maximizing private LOLR scheme.We compare the policies formulated by these institutions from the viewpoint of social desirability.Our model targets the debate on free banking, in particular the issue of whether private institutions would fare well as lenders of last resort.In our model, the first-best LOLR scheme always covers the whole banking sector and offers full insurance to the participants.We find that voluntary schemes succeed relatively well as lenders of last resort in situations where recipients of LOLR assistance can repay LOLR loans with interest.In this case, the LOLR can use interest rate policy to make the scheme attractive to banks of every quality and thus create incentives for comprehensive entry.In private schemes, policy tends to be distorted if the private scheme is the only possible scheme.However, competitive forces lead private institutions to approach the first-best outcome, which is the only contestable outcome.The end result changes when we investigate a situation in which banks' ability to repay LOLR loans is limited. When lending is associated with losses for the LOLR, good quality banks will tend to stay out of the LOLR scheme and participation in voluntary schemes will always fall short of the first-best outcome. A compulsory scheme (such as a central bank that can impose a reserve requirement on banks) has an advantage over voluntary schemes.Key words: liquidity, lender of last resort, banking, central banking, governance
  • Herrala, Risto (2012)
    Suomen Pankki. E 48
    Chapter 1 Introduction 11 Chapter 2 Reserve pools 23 Chapter 3 Public intervention and financial crises: an empirical study 43 Chapter 4 Credit conditions and durable consumption: evidence of a strong link 67 Chapter 5 The influence of bank ownership on credit supply: evidence from Russia's recent financial crisis 89 Chapter 6 Conclusions 109
  • Karas, Alexei; Schoors, Koen; Lanine, Gleb (2008)
    BOFIT Discussion Papers 19/2008
    We suggest an additional transmission channel of contagion on the interbank market - the liquidity channel. Examining the Russian banking sector, we and that the liquidity channel contributes significantly to understanding and predicting interbank market crises. Interbank market stability Granger causes the interbank market structure, while the opposite causality is rejected. This bolsters the view that the interbank market structure is endogenous. The results corroborate the thesis that prudential regulation at the individual bank level is insufficient to prevent systemic crises. We demonstrate that liquidity injections of a classical lender of last resort can effectively mitigate coordination failures on the interbank market both in theory and practice. Apparently, liquidity does matter.
  • Nyberg, Peter (1997)
    Suomen Pankin keskustelualoitteita 1/1997
    Systemic bank problems arise for a large number of causes and in spite of both active banking supervision and market discipline. Once a problem has emerged, swift action is needed to limit further losses, avoid financial destabilization, and regain efficient markets.The restructuring exercise is essentially microeconomic in nature, but has strong links to the development of the whole economy.Particularly important is to improve risk management in banks and support only viable banks with fit and proper governance. Government bank support is ultimately constrained by the need to safeguard government creditworthiness, and bank creditors may therefore have to carry substantial parts of the loss.Monetary policy should aim for a low and stable rate of inflation without sudden changes in interest or exchange rates, but lending of last resort should remain available at government risk.Bank restructuring is complicated by the need to simultaneously restructure important bank customers. Key words: banking crisis, bank restructuring, financial stability, government support, macro-economic policy
  • Herrala, Risto (2000)
    Suomen Pankin keskustelualoitteita 3/2000
    We study the long standing issue of whether markets can supply banks with sufficient liquidity or whether markets should be complemented with a lender of last resort (LOLR).For this purpose, we develop an extended version of the recent model of Holmström and Tirole (1998) on the supply of liquidity to firms. H&Ts original model analyses liquidity supply to firms that are facing solvency shocks.We apply their framework to banking and extend the framework to admit the analysis of problems associated with transitory liquidity outflows, even absent any change in a bank's value.Our premise is that the scope for moral hazard may increase in connection with liquidity outflows.Moral hazard, which we interpret as the possibility of laxity in banks' monitoring of firms, may increase with liquidity outflows because banks need to increase their monitoring efforts in order to safeguard their own interests. The model illustrates many key aspects of the classical LOLR debate.The model shows how moral hazard limits of banks' ability to borrow from markets to cover liquidity outflows.It also predicts banks' demand for liquid reserves and the economies associated with centralization of reserves in a liquidity pool when the holding of liquid reserves entails opportunity costs.Finally, the model enables discussion of viable lending policies for the LOLR and contrast these with the 'Bagehotian principles', which are still widely used as benchmark criteria in evaluating LOLR operations. Key words: liquidity, lender of last resort, banking, central banking
  • Toporowski, Jan (2006)
    Bank of Finland Research Discussion Papers 14/2006
    The emergence of the New Consensus in monetary policy has been followed by a renewal of interest in central banks' operating procedures, and specifically in the role of open market operations. There is a general view that overnight interest rates are most effectively controlled by standing or discount window facilities, rather than open market operations, and this view will probably now extend also to lender-of-last-resort intervention.The paper argues that this reduced role for open market operations is only in the context of controlling overnight rates of interest.In spite of the emphasis on control of overnight interest rates, medium and long-term interest rates remain the crucial instruments in the monetary transmission mechanism.Longer-term interest rates are susceptible to influence by open market operations, and their importance grows with financial development. Keywords: central banks, monetary policy, open market operations JEL classification numbers: E52, E58