Which Institution Best Decreases Banks' Liquidity Risk: A Securities Market or a Lender of Last Resort?
28 Pages Posted: 18 Aug 2004
Date Written: May 30, 2004
The joint existence of a lender of last resort and of a stock market is usually considered the sign of a developed financial infrastructure. This paper analyzes whether a securities market may play a role similar to that of a lender of last resort by being of assistance to a bank which faces possible liquidity shortages. It is examined which of these two institutions best prevents a bank's liquidity shortages while allowing the optimal allocation of the bank's resources. Our results suggest that securities markets matter more for the liquidity of banks than a lender of last resort.
Keywords: Financial markets, Lender of last resort, Liquidity risk
JEL Classification: G21, O16
Suggested Citation: Suggested Citation