Liquidity provision vs. deposit insurance: preventing bank panics without moral hazard
- 485 Downloads
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.
Unable to display preview. Download preview PDF.