Presentation in a seminar:
This paper proposes a model where systemic banks coexist with non-systemic banks. Troubles in a systemic bank may hurt non-systemic banks but not vice versa. We analyze the decision of the central banker and the deposit insurer to provide emergency liquidity assistance to illiquid banks whose solvency conditions are only observed through supervision. We find that the existence of systemic banks provides a rationale for the central bank to act as lender of last resort in a larger range of banks' liquidity shortfalls than when all banks are non-systemic. We discuss policy implications that inform current reform efforts to the architecture of banking regulation and supervision.
Fédération des Banques Françaises Research Initiative on Investment banking and financial markets