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Economic Theory

, Volume 28, Issue 1, pp 197–211 | Cite as

Liquidity provision vs. deposit insurance: preventing bank panics without moral hazard

  • Antoine MartinEmail author
Article

Summary.

In this paper I ask whether a central bank policy of providing liquidity to banks during panics can prevent bank runs without causing moral hazard. This kind of policy has been widely advocated, most notably by Bagehot (1873). I show a particular central bank liquidity provision policy can prevent bank panics without moral hazard problems. I also show that a deposit insurance policy, while preventing runs, can create moral hazard problems.

Keywords and Phrases:

Bank panics Liquidity provision Deposit insurance Moral hazard. 

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Copyright information

© Springer-Verlag Berlin/Heidelberg 2006

Authors and Affiliations

  1. 1.Federal Reserve Bank of New YorkNew YorkUSA

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