Which Institution Best Decreases Banks' Liquidity Risk: A Securities Market or a Lender of Last Resort?

28 Pages Posted: 18 Aug 2004

See all articles by Raphael Franck

Raphael Franck

Hebrew University of Jerusalem - Department of Economics

Miriam Krausz

Bar-Ilan University - Department of Economics

Date Written: May 30, 2004

Abstract

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

Franck, Raphael and Krausz, Miriam, Which Institution Best Decreases Banks' Liquidity Risk: A Securities Market or a Lender of Last Resort? (May 30, 2004). Available at SSRN: https://ssrn.com/abstract=553362 or http://dx.doi.org/10.2139/ssrn.553362

Raphael Franck (Contact Author)

Hebrew University of Jerusalem - Department of Economics ( email )

Mount Scopus
Jerusalem, 91905
Israel

Miriam Krausz

Bar-Ilan University - Department of Economics ( email )

Ramat-Gan, 52900
Israel
+97 23 531 7220 (Phone)
+97 23 531 3180 (Fax)

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