scholarly journals Imperfect Competition in the Interbank Market for Liquidity as a Rationale for Central Banking

2012 ◽  
Vol 4 (2) ◽  
pp. 184-217 ◽  
Author(s):  
Viral V Acharya ◽  
Denis Gromb ◽  
Tanju Yorulmazer
Keyword(s):  
Central Bank ◽  
Market Power ◽  
Financial Crises ◽  
Imperfect Competition ◽  
Central Banking ◽  
Interbank Market ◽  
Asset Sales ◽  
Lender Of Last Resort ◽  
Interbank Lending ◽  
Liquidity Frictions

We study interbank lending and asset sales markets in which banks with surplus liquidity have market power vis-à-vis banks needing liquidity, frictions arise in lending due to moral hazard, and assets are bank-specific. Surplus banks ration lending and instead purchase assets from needy banks, an inefficiency more acute during financial crises. A central bank acting as a lender-of-last-resort can ameliorate this inefficiency provided it is prepared to extend potentially loss-making loans or is better informed than outside markets, as might be the case if it also performs a supervisory role. This rationale for central banking finds support in historical episodes. (JEL E58, G01, G21, G28, L13, N21)

scholarly journals Economic Accounts and Financial Systems

2021 ◽  
pp. 1-9
Author(s):  
Ulrich Bindseil ◽  
Alessio Fotia
Keyword(s):  
Central Bank ◽  
Balance Sheet ◽  
Central Banking ◽  
Lender Of Last Resort ◽  
Financial Systems ◽  
Financial Flows ◽  
Balance Sheets ◽  
The Government ◽  
Real Assets ◽  
Bank Money

AbstractThis chapter introduces the system of accounts of the main sectors of the economy (households; non-financial corporations, the government; banks, and the central bank), describing how these sectors are interrelated through financial claims and liabilities. A financial system, consisting of commercial banks and the central bank, manages flows of funds originating from households, without these flows causing a need for the real sectors to liquidate illiquid real assets. The basic types of assets and liabilities are: real goods, gold, banknotes, deposits, bonds, loans, and equity. We explain how the shortcomings of both IOU and commodity-money based financial systems can be solved via establishing a central bank. A central bank is defined here by its balance sheet and central bank money is the central bank’s basic liability. Both monetary policy implementation and lender of last resort issues relate to liquidity flows within balance sheets. Understanding the logic of basic financial flows is therefore the basis for understanding central banking.

LIQUIDITY, INTERBANK MARKET, AND THE SUPERVISORY ROLE OF THE CENTRAL BANK

2003 ◽  
Vol 7 (2) ◽  
pp. 192-211 ◽  
Author(s):  
Young Sik Kim
Keyword(s):  
Central Bank ◽  
Banking System ◽  
Central Banking ◽  
Bank Loans ◽  
Interbank Market ◽  
Monitoring Cost ◽  
Delegated Monitoring ◽  
The Individual ◽  
Cash Reserves

This paper provides an explanation for the supervisory role of the central bank in a monetary general equilibrium model of bank liquidity provision. Under incomplete information on the individual banks' liquidity needs, individual banks find it optimal to invest solely in bank loans holding no cash reserves, and rely on the interbank market for their withdrawal demands. Using the costly state verification approach under uncertainty in aggregate liquidity demands, the supervisory role of the central bank as a large intermediary arises as an incentive-compatible arrangement by which banks hold the correct level of cash reserves. First, it takes up a delegated monitoring role for the banking system. Second, it engages in discount-window lending at a penalty rate, where the discount margin covers exactly the monitoring cost incurred. Finally, under the central banking mechanism, currency premium no longer exists in the sense that currency is worth the same as deposits having an equal face value.

Book Reviews

2012 ◽  
Vol 50 (4) ◽  
pp. 1109-1113
Keyword(s):  
Financial Crises ◽  
Market Integration ◽  
Asset Prices ◽  
Exchange Rate Volatility ◽  
Asset Markets ◽  
Financial Contagion ◽  
Bank Failures ◽  
Interbank Market ◽  
Lender Of Last Resort ◽  
Private And Public

Goetz von Peter of Bank for International Settlements reviews, “Liquidity and Crises” by Franklin Allen, Elena Carletti, Jan Pieter Krahnen and Marcel Tyrell. The EconLit Abstract of this book begins: “Twenty-five previously published papers examine liquidity and its role in financial crises. Papers discuss preference shocks, liquidity, and central bank policy; endogenous liquidity in asset markets; financial intermediaries and markets; financial fragility, liquidity, and asset prices; interbank market integration under asymmetric information; banks as monitors of other banks-evidence from the overnight federal funds market; private and public supply of liquidity; liquidity, efficiency, and bank bailouts; financial crises, payment system problems, and discount window lending; liquidity, risk taking, and the lender of last resort; coordination failures and the lender of last resort-whether Walter Bagehot was right after all; competition among regulators and credit market integration; money in a theory of banking; liquidity and asset prices; collateral constraints in a monetary economy; inefficient credit booms; financial contagion through capital connections-a model of the origin and spread of bank panics; information contagion and bank herding; cash in-the-market pricing and optimal resolution of bank failures; credit risk transfer and contagion; estimating bilateral exposures in the German interbank market-whether there is a danger of contagion; asset market linkages in crisis periods; strategic complementarities and the twin crises; inefficient foreign borrowing-a dual- and common-agency perspective; and exchange rate volatility and the credit channel in emerging markets-a vertical perspective. Allen is Nippon Life Professor of Finance, Professor of Economics, and the codirector of the Wharton Financial Institutions Center in the Wharton School at the University of Pennsylvania. Carletti is Professor of Economics and Joint Chair of the Economics Department and the Robert Schuman Center for Advanced Studies at the European University Institute. Krahnen is Chair of Corporate Finance at Johann Wolfgang Goethe-University Frankfurt. Tyrell is Professor of Entrepreneurship and Finance at Zeppelin University. Index.”

Lender of Last Resort

2019 ◽  
pp. 136-154
Author(s):  
Ulrich Bindseil
Keyword(s):  
Central Bank ◽  
Financial Stability ◽  
Debt Crisis ◽  
Central Banks ◽  
Central Banking ◽  
Lender Of Last Resort ◽  
Central Bank Money ◽  
Bank Of England ◽  
European Debt Crisis ◽  
Bank Money

The recent central banking literature often argues that the LOLR function would be the key feature defining a ‘modern’ central bank. This chapter argues that this view may appear too radical (despite the enormous benefits of the LOLR) as the appearance of the LOLR does not change the nature of central banking (which is primarily associated with the issuance of central bank money). After providing an overview of the roles of central banks for financial stability, the chapter focuses on one early LOLR episode, namely the measures of the Hamburger Bank, Bank of Amsterdam and Bank of England in the European debt crisis of 1763. It is shown that in particular the Hamburger Bank acted as systemic lender of last resort, comparable to what modern central banks did in 2008.

The Future of Central Banking

2019 ◽  
Vol 0 (0) ◽  
Author(s):  
Hiromi Yamaoka
Keyword(s):  
Central Bank ◽  
Central Banks ◽  
Central Banking ◽  
Lender Of Last Resort ◽  
Monetary Policies ◽  
Settlement Systems ◽  
Nation States ◽  
Technological Advances ◽  
The Future ◽  
History Of

Abstract Compared to the history of money and banking, the history of central banking is fairly brief and has been influenced by the development of modern nation states, by the economic environment and by technological advances. Accordingly, on-going innovations in digital technologies and the globalization of the economy are expected to have significant impacts on central banking in the future. Since all the core activities of central banking, such as the issuance of money, the operation of settlement systems, its function as lender of last resort and its monetary policy, are based upon “trust”, its history has been, and its future will also be, closely linked to the most efficient framework in terms of building trust and reflecting changing technological and institutional conditions. Even though digital innovation may influence the styles of central banks in the future, the relevance and effectiveness of their payment and settlement infrastructures, their function as lenders of last resort and their monetary policies will be maintained. Besides, the need for risk-free central bank money will remain strong on account of its capacity to reduce risks in economic transactions, and central banks will have to continue making efforts to meet these demands through the enhancement of the utility of their infrastructure, including real-time gross settlement systems. Regarding central bank digital currencies, many issues require further examination. The future of central banking will be closely interlinked with that of nation states and depends on its capacity to identify the ideal mode of utilizing information and data in the economy.

scholarly journals Current Federal Reserve Policy under the Lens of Economic History: A Review Essay

2016 ◽  
Vol 54 (3) ◽  
pp. 922-934 ◽  
Author(s):  
Stephen D. Williamson
Keyword(s):  
Central Bank ◽  
Federal Reserve ◽  
Review Essay ◽  
Economic History ◽  
Bank Lending ◽  
Central Banking ◽  
Open Market ◽  
Lender Of Last Resort ◽  
Banking History ◽  
Federal Reserve Policy

This review essay reviews the volume edited by Owen Humpage, Current Federal Reserve Policy under the Lens of Economic History: Essays to Commemorate the Federal Reserve System’s Centennial, and provides a broader perspective on central-banking issues. The papers in the Humpage volume address various aspects of central banking history, money, and private banking, with a focus on putting recent Fed policies in perspective. The topics covered include the role of the central bank as lender of last resort, the effects of open-market operations versus central-bank lending, central-bank independence, the political economy of monetary unions, financial crises, the effects of unconventional monetary policies, commodity monies, and the Canadian financial system as a natural experiment. (JEL E32, E52, E58, G01, G21, G28, N10)

The Position Of The Bank Indonesia As The Lender Of Last Resort After The Enactment Of Law No. 9 Of 2016 On Prevention And Mitigation Of Financial System Crisis

2017 ◽  
Vol 5 (4) ◽  
pp. 08-11
Author(s):  
Theresia Anita Christiani
Keyword(s):  
Data Analysis ◽  
Central Bank ◽  
Financial Services ◽  
Qualitative Data ◽  
Secondary Data ◽  
Jel Classification ◽  
Lender Of Last Resort ◽  
Short Term ◽  
Paper Review

Objective - This paper explores the role of the Indonesian Central Bank as the Lender of the Last Resort. Methodology/Technique - This research uses normative juridical research and secondary data. Findings - The results indicate that the Bank of Indonesian, in coordination with the Financial Services Authority, still has the authority to grant short-term loans for banks with liquidity issues. Nevertheless, the Bank of Indonesia does not have authority to provide emergency finance facilities where the funding is granted at the government's expense. Novelty - This paper uses normative juridical research and qualitative data analysis. Type of Paper - Review. Keywords: Authority, Bank, Crises, Position, Prevention, Indonesia. JEL Classification: K10, K20.

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