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A reduction in lender of last resort (LOLR) policy uncertainty positively affects bank lending and propagates to investment and employment. We exploit a unique policy that reduced uncertainty regarding the availability of future LOLR funding for banks as a quasi-natural experiment. Using micro-level data on banks, firms and loans in Portugal, we generate cross-sectional variation in banks’ exposure to uncertainty and find that the size of the haircut subsidy - the gap between private market and central bank security valuations - plays a key role in the propagation of the shock to lending and the real economy.

What role could unconventional monetary policy – and particularly unconventional policies like private asset purchases under a quantitative easing or lender of last resort scheme – play in influencing economic growth directly? A wide literature in economics explores the pros and cons of using these policies. However, most studies also point to the uncertain and antagonistic legal basis for such purchases. In this paper, we show how the statutory mandate for nominal GDP targeting could best put in place the legal foundations for such asset purchases. We review the legislative and regulatory bases for private securities purchases made by central banks in a sample of countries. We discuss – if legislators and policymakers wanted to – how they might introduce clearer mandates to make such purchases into their public law. We finally show how legal authorizations for GDP targeting might (and probably should) provide for such authorisations. Our discussion sheds light on the fascinating and almost completely ignored area of public law, namely central bank law.

To what extent can a central bank influence its own balance sheet credit risks during a financial crisis through unconventional monetary policy operations? To study this question we develop a risk measurement framework to infer the time-variation in portfolio credit risks at a high (weekly) frequency. Focusing on the Eurosystem’s experience during the euro area sovereign debt crisis between 2010 and 2012, we find that the announcement and implementation of unconventional monetary policy operations generated beneficial risk spill-overs across policy portfolios. This caused overall risk to be nonlinear in exposures. In some instances the Eurosystem reduced its overall balance sheet credit risk by doing more, in line with Bagehot’s well-known assertion that occasionally “only the brave plan is the safe plan.”

The aim of this work is to study the pricing in the cryptocurrency market and applying cryptocurrencies by the Bank of Russia for its monetary policy. The research objectives are to identify the cyclical nature of price dynamics, to study market maturity and potential risks that have a long-term positive relationship with the financial stability of the cryptocurrency market. The author uses the Hurst method with the Amihud illiquidity measure to study the resistance of four cryptocurrencies (Bitcoin, Litecoin, Ripple and Dash) and their evolution over the past five years. The study results in the author’s conclusion that the cryptocurrency market has entered a new stage of development, which means a reduced possibility to have excess profits when investing in the most liquid cryptocurrencies in the future. However, buying new high-risk tools provides opportunities for speculative income. The author concludes that illiquid cryptocurrencies exhibit strong inverse anti-persistence in the form of a low Hurst exponent. A trend investing strategy may help obtain abnormal profits in the cryptocurrency market. The Bank of Russia could partially apply digital currency to implement monetary policy, which would soften the business cycle and control the inflation. If Russia accepts the law ‘’On Digital Financial Assets’’ and legalizes cryptocurrencies after the economic crisis caused by the COVID-19 pandemic, the Bank of Russia might act as a lender of last resort and offer crypto loans.

The design of lender-of-last-resort interventions can exacerbate the bank-sovereign nexus. During sovereign crises, central bank provision of long-term liquidity incentivizes banks to purchase high-yield eligible collateral securities matching the maturity of the central bank loans. Using unique security-level data, we find that the European Central Bank’s 3-year Long-Term Refinancing Operation caused Portuguese banks to purchase short-term domestic government bonds, equivalent to 10.6% of amounts outstanding, and pledge them to obtain central bank liquidity. The steepening of eurozone peripheral sovereign yield curves right after the policy announcement is consistent with the equilibrium effects of this “collateral trade.”

A core responsibility of the Federal Reserve is to ensure financial stability by acting as the “lender of last resort” through its discount window (DW). Historically, however, the DW has not been effective because its usage is stigmatized. In this paper, we develop a coordination game with adverse selection, and we test in the lab policies that have been proposed to mitigate DW stigma. We find that lowering the DW cost and making DW borrowing difficult to detect are ineffective, but regular random DW borrowing can overcome DW stigma. Implications for other forms of stigma in finance are discussed.

The biggest challenge for the Islamic banking industry in Pakistan is the scarcity of Shariah-compliant investment instruments and the absence of a lender of last resort (LOLR) facility for Islamic banks. Due to the problem of surplus liquidity, returns for Islamic banks in Pakistan are lower as compared to the conventional counterparts putting them at a competitive disadvantage with respect to their competitor conventional banks. Sukuk issuance is associated with a high cost of issuance and legal complexity, problems that could be solved by the application of blockchain technology. With the advent of cryptocurrency and developments around blockchain, technology experts, industry professionals along with Shariah scholars have been working to introduce FinTech in Shariah-compliant financing products and services. This research applies a qualitative approach. The study relies on primary data from interviews and secondary data from published sources, academic journals, government and private-sector reports, and public domain including newspaper articles, and websites. Interviews are conducted from blockchain technology experts along with banking \& commerce industry professionals. This study highlights financial instability, lack of financial education and absence of political will being the main reasons for low Sukuk issuance in Pakistan. This study proposes a low-cost smart Sukuk structure to address the liquidity problem of the Islamic banking industry in Pakistan. It is found that smart Sukuk issuance and transaction fees are much lower than the current Sukuk issuances and are expected to be more secure and marketable internationally. Blockchain-based smart Sukuk are practicable to solve the problem of standardization and huge issuance and maintenance cost for the Sukuk industry. The proposed structure could be adopted by governments and organizations to issue Sukuk promising transparent, economical, efficient, and reliable business transactions for both parties.

The COVID-19 run on medical resources crashed Wuhan’s medical care system, a medical disaster duplicated in many countries facing the COVID-19 pandemic. In a novel approach to understanding the run on Wuhan’s medical resources, we draw from bank run theory to analyze the causes and consequences of the COVID-19 run on Wuhan’s medical resources and recommend policy changes and government actions to attenuate runs on medical resources in the future. Like bank runs, the cause of the COVID-19 medical resource run was rooted in China’s local medical resource context and a sudden realignment of expectations, reflecting shortages and misallocations of hospital resources (inadequate liquidity and portfolio composition), high level hospitals siphoning-off patients from lower level health providers (bank moral hazard and adverse selection problem), patients selecting high-level hospitals over lower-level health care (depositor moral hazard problem), inadequate government oversight and uncontrolled risky hospital behavior (inadequate bank regulatory control), biased medical insurance schemes (inadequate depositor insurance), and failure to provide medical resource reserves (failure as lender of last resort). From Wuhan’s COVID-19 run on medical resources, we recommend that control and reform by government enlarge medical resource supply, improve the capacity of primary medical care, ensure timely virus information, formulate principles for the allocation of medical resources that suit a country’s national conditions, optimize the medical insurance schemes and public health fund allocations and enhance the emergency support of medical resources.

When a government implements an LOLR policy during a crisis, creditors can infer a bank’s quality by whether the bank borrows government loans. We establish a formal model to study an LOLR policy in the presence of this signaling effect. We find that three equilibria exist: a separating equilibrium where only low quality banks borrow from the government and two pooling equilibria where both high and low quality banks do and do not borrow from the government. Further, we find that the government’s lending rate serves an important signaling role and that hiding the identity of the banks that borrow government loans tends to encourage banks to do so. We also find two welfare effects of the LOLR policy: the liquidation cost saving and moral hazard. Depending on which effect dominates, the optimal LOLR policy differs.

This article investigates the classical monetary theory on bank liquidity and finance and especially the contribution of Thomas Tooke, John Stuart Mill and John Fullarton at the light of the debate on the Great Recession. These authors show how financial markets and banking system may collapse altogether after a rise of values in certain classes of securities or real estate markets. And they come to the view that competition between commercial banks creates the appearance of market discipline, while the expectation of scarcity in some specific markets leads to a speculative process, which in turn destabilizes the banking system and triggers the need for the lender of last resort.

The relevance of the research subject is due to the fact that countries look for adaptive approaches to the turbulence of the international monetary system (IMS). The approaches of the BRICS countries to the IMS transformation have been fully studied in the economic literature. However, there are no researches on foundation of an advanced central bank as an alternative supranational monetary institution in the new international fnancial architecture. The article objective is to develop a mechanism for setting up the refnancing rate for the BRICS countries in case of the integration hypothesis the currency union, and the lender of last resort and the general unit of accounts. A liberal pricing method has been used to create the model. There is a hypothesis that the refnancing rate should be set at a higher level than that of the People’s Bank of China’s and lower than that of Brazil, Russia, India and South Africa’s, since it has comparative advantages in crediting. The mechanism of the consensual rate of the BRICS countries is based on the assumption that the amount of money in circulation may vary by an amount that does not cause negative consequences for national economies. The fundamental difference between the results of this study is in optimization of the credit resources flow, which implies their distribution within certain limits and in several stages. The main provisions indicate that the optimal rate may provide a background for the coordination of monetary policies in the BRICS countries within the Central bank. The practical relevance of the model is that it can be used to establish the refnancing rate in the BRICS countries. The model suggests that the optimal crediting value in the BRICS countries should ft the GDP growth limits. To conclude, the optimal refnancing rate is a key issue in forming a monetary union and a common currency in the BRICS countries.

During the global banking crisis of 2007-2009 and the Eurozone sovereign debt crisis of 2010-2012 the so called ‘TARGET2 imbalances’ attracted considerable attention. Some economists interpreted them as a symptom of the ECB’s ‘stealth bail-out’. The aim of the paper is to highlight that contrary to such claim, the emergence of TARGET2 imbalances reflected the benefits of having a mutual central bank within a monetary union which facilitated cross-border funding in spite of the global financial turbulence. The ECB’s liquidity loans to commercial banks in the Eurozone debtor countries shielded the Eurozone from a much deeper financial crisis than it actually occurred. The emergence of the TARGET 2 imbalances was actually only an accounting phenomenon resulting from the fact that these liquidity loans were technically extended by the debtor countries’ national central banks which are de facto (from the monetary policy perspective) ECB’s regional branches.

The present paper attempts to expand the existing literature on Central Bank Independence (CBI) by proposing new measures for CBI. It designs two indices: one tackling the de jure CBI and the other assessing the de facto level of CBI. The two measures outweigh traditional measures in various aspects; first, the two indices are more comprehensive in terms of possible institutional arrangements. The de jure index incorporates several aspects related to CBI that were not previously grouped together in a unified index i.e. financial independence, limitations related to indirect credit to government, accountability and transparency. The de facto index comprises the main existing indicators for measuring actual CBI (i.e. turnover ratio, political vulnerability indicator and monetary policy reaction function) in addition to new variables, as the lender of last resort function, independence of central bank board, and financial independence that were not included in almost all previous studies. Second, the two indices allow a higher level of precision as they comprise aspects that can be objectively codified with a minimum level of subjectivity. Third, the two indices cover the same attributes of CBI to facilitate measuring the deviation between de jure and de facto level of independence for any central bank. The current paper provides a comprehensive definition and analysis of both indices to enable their replication in future studies.

We consider a macroprudential approach to analyze the optimal lending policy for the central bank, focusing on spillover effects that policy exerts on money markets. Lending against high-quality collateral protects central banks against losses, but can adversely affect liquidity creation in markets since high-quality collateral gets locked up with the central bank rather than circulating in markets. Lending against low-quality collateral creates counterparty risk but can improve liquidity in markets. We illustrate the optimal policy incorporating these trade-offs. Contrary to what is generally accepted, lending against high-quality collateral can have negative effects, whereas it may be optimal to lend against low-quality collateral.

In this paper I set up a primary surplus target zone model—differently from some previous papers that used instead an interest rate target zone model— both to interpret the public debt euro area crisis and, more importantly, to draw some more general conclusions as to the role of the primary surplus in preventing speculative attacks against public debt. This primary surplus target zone model also allows considering the effects resulting from either a small or a big government. If a small government determines a higher GDP growth than a big one, then a higher steady state public debt-to-GDP level can be obtained in the first case. However, this paper shows that in the case of a credible fiscal upper target it also turns out that such a difference does not affect the size of the expectation effect determining the ‘honeymoon’. Moreover, when the primary surplus reaches its upper boundary—something that will occur inevitably, irrespective of the size of the government determining the primary surplus— monetary policy and the presence of a lender of last resort remain essential to stabilize the public debt and avoid speculative attacks.

In the financial crisis and recession induced by the Covid-19 pandemic, many investment-grade firms became unable to borrow from securities markets. In response, the Fed not only reopened its commercial paper funding facility but also announced it would purchase newly issued and seasoned corporate bonds rated as investment grade before the Covid pandemic. We assess the effectiveness of this program using long sample periods, spanning the Great Depression through the Great and Covid Recessions. Findings indicate that the announcement of corporate bond backstop facilities helped stop risk premia from rising further than they had by late-March 2020. In doing so, these backstop facilities limited the role of external finance premia in amplifying the macroeconomic impact of the Covid pandemic. Nevertheless, the corporate bond programs blend the roles of the Federal Reserve in conducting monetary policy via its balance sheet, acting as a lender of last resort, and pursuing credit policies.

The Federal Reserve has long used policy frameworks to both explain and inform its policymaking. These policy frameworks typically explain what the Fed is seeking to achieve in a given domain and how it plans to achieve its desired aims. Two prominent examples are the Fed’s use of Bagehot’s dictum when acting as a lender of last resort and its monetary policy framework issued in 2012 and revised in 2020. In both instances, the framework provides a foundation for informed debate among Fed policymakers, Congress, and the public, enhancing both efficacy and accountability. Since the onset of the Covid crisis, the Fed has entered into a new domain of credit policy, but it has yet to provide a cohesive policy framework explaining what it is seeking to achieve and how it plans to accomplish given aims. This has made it far harder to assess whether the myriad new credit facilities that the Fed has created have in fact achieved desired aims and the drawbacks of those facilities. Just as importantly, it contributed to a disconnect between what Congress expected when it gave the Fed and Treasury $454 billion in the CARES Act and Fed and Treasury’s failure to use more than a fraction of those funds despite ongoing economic headwinds. Developing a cohesive framework for credit policy may not be an easy task, but the challenges embedded in the task are precisely what make it so important.

Financial institutions play a key role in addressing problems of information asymmetry, adverse selection, and moral hazard. Commercial banks fundamentally take deposits and make loans, but provide other retail, commercial, and global wholesale services. Investment banks perform two basic functions: providing an array of services for corporations and governments needing funds, and performing services as brokers and dealers to investors. Some significant business areas are trading, research, merger and acquisition services, capital raising, and asset securitization. Central banks have slightly different roles in different countries. The US Fed oversees and regulates financial institutions, executes monetary policy, and acts as lender of last resort, among other functions. “Challenger banks” are disruptors which are: all mobile, user friendly, data driven, AI (Artificial Intelligence) enhanced, with open APIs (application program interface), no foreign exchange fees, robo investment advisory, and simplified money transfers. Insurance companies, pension funds, and hedge funds are also important to environmental, social, and governance investing.

The International Monetary Fund (IMF) has dual institutional roles: a steward of international financial stability and a global banker safeguarding the resources of its sovereign shareholders. But, how does the IMF behave when its balance sheet becomes exposed to higher-than-usual credit risk, creating a financial catch-22? We expect the IMF varies its lending behavior, based on the nature of sovereign credit crises. When there is high contagion risk, the IMF aims to preserve global financial stability as a lender of last resort by extending large loans, notwithstanding its balance sheet strains. The IMF employs policy conditionality to hedge its lending risk, but prioritizes alleviating global market turmoil over program compliance. When market contagion is contained, however, the IMF is more likely to act as a traditional banker, suspending programs for non-compliance. Ironically, given its tendency to forgive non-compliance as a lender of last resort, our theoretical framework suggests that the Fund intensifies its moral hazard problem. We test our theoretical priors by conducting a comparative case study analysis of IMF decision-making over time for two of its largest borrowers: Argentina and Greece. Leveraging volumes of hundred-paged minutes from IMF executive board meeting archives and extensive field research interviews, we illustrate the lending stances of IMF directors evolve in response to changes in global contagion risk. By examining the IMF’s own institutional agency under high financial risk, this study offers new insights for the study of international political economy and international organizations.

I study the implications for central bank discount window stigma of the model by Philippon and Skreta (2012). I take an equilibrium perspective for a given discount window program, instead of following the mechanism design approach of the original paper. This allows me to highlight the impact of equilibrium multiplicity on the set of possible outcomes. In the model, firms (banks) need to borrow to finance a productive project. There is limited liability and firms have private information about their ability to repay their debts. This creates an adverse selection problem. The central bank can ameliorate the impact of adverse selection by lending to firms. Discount window borrowing is observable and it may be taken as a signal of firms’ ability to repay debts. Under some conditions, firms borrowing from the discount window may pay higher interest rates to borrow in the market, a phenomenon often associated with the presence of stigma. I discuss these conditions in detail and what they suggest about the relevance of stigma as an empirical phenomenon.

In this paper, we study the optimal design of financial safety nets under limited private credit. We ask when it is optimal to restrict ex ante the set of investors that can receive public liquidity support ex post. When the government can commit, the optimal safety net covers all investors. Introducing a wedge between identical investors is inefficient. Without commitment, an optimally designed financial safety net covers only a subset of investors. Compared to an economy where all investors are protected, this results in more liquid portfolios, better social insurance, and higher ex ante welfare. Our result can rationalize the prevalent limited coverage of safety nets, such as the lender of last resort facilities.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

As a result of legal restrictions on branch banking, an extensive interbank system developed in the United States during the 19th century to facilitate interregional payments and flows of liquidity and credit. Vast sums moved through the interbank system to meet seasonal and other demands, but the system also transmitted shocks during banking panics. The Federal Reserve was established in 1914 to reduce reliance on the interbank market and correct other defects that caused banking system instability. Drawing on recent theoretical work on interbank networks, we examine how the Fed’s establishment affected the system’s resilience to solvency and liquidity shocks and whether these shocks might have been contagious. We find that the interbank system became more resilient to solvency shocks but less resilient to liquidity shocks as banks sharply reduced their liquidity after the Fed’s founding. The industry’s response illustrates how the introduction of a lender of last resort can alter private behavior in a way that increases the likelihood that the lender will be needed.

This paper analyses the new role of market‐maker of last resort openly assumed by central banks since the 2008 financial crisis revealed the increasing impact of noninterest‐income activities on banks' balance sheets. A brief review of the distinction between conventional and unconventional monetary policies shows that the inflexion point from lender of last resort to market‐maker of last resort is given by the extension of central bank intervention to other markets than the bank reserves markets. Herein, it is explained how the market‐maker of last resort role is as counterproductive as its predecessor in putting the economy back on track. We show that the main problem of both conventional and unconventional monetary policies is that they distort price signals, particularly asset prices, in their attempt to reignite economic growth. Instead of correcting cyclical fluctuations, the policies of the market‐maker of last resort prevent the cyclical divergences between financial and goods sectors from readjusting.

I examine the relation between Federal Reserve emergency actions and aggregate U.S. systemic risk during the Global Financial Crisis (GFC) and the COVID-19 crisis. I divide these actions in to three categories: lender of last resort (LLR), liquidity provision, and open market operations (OMO). Evidence suggests that during the GFC, liquidity provision and OMO was related * to reduced systemic risk, while evidence on LLR actions is mixed. Further, I find that Federal Reserve actions were related to increased stability in other G8 financial systems during the GFC, and that after the GFC, facilities that remained operational were no longer related to aggregate systemic risk. I do not find a relation between Federal Reserve actions and systemic risk during the COVID-19 crisis. Together, these findings can inform actions and policy decisions in future financial crises.

Once banks are viewed as money creators rather than financial intermediaries, a distinction between their cash funding and balance sheet funding can be made. This distinction opens up various insights. It allows for a fuller explanation of the cash needs of banks with reference to the pattern of their cash gains and losses. It facilitates an understanding of the central bank as not only a cash lender of last resort (LOLR) for some banks some of the time, but also as a cash lender of continual and only resort (LOCOR) for all banks all of the time. It leads to novel insights into the sources of banks' balance sheet funding. The paper investigates the various implications of the central bank's elastic currency policy in its role as LOCOR, particularly how it thereby incites considerably more moral hazard than conventionally acknowledged. This realisation opens up a better understanding of the banking sector's proneness to excess and the economy's susceptibility to financial cycles. The paper concludes by weighing the merits of the only two policy strategies by which banking excess can be checked.

Purpose The purpose of this paper is to propose reforms that would establish a credible framework of rules to constrain and guide emergency lending by the Federal Reserve and by fiscal authorities during a future financial crisis. Design/methodology/approach The authors propose a set of five overarching rules, informed by history, empirical evidence and theory, which would serve as the foundation on which detailed legislation should be constructed. Findings The authors find that the current framework governing emergency lending – including reforms to Federal Reserve lending enacted after the recent crisis – is inadequate and not credible, and that their proposed framework would constitute a credible balancing of costs and benefits. Practical implications Adequate assistance to financial institutions would be provided in systemic crises but would be limited in its form, and by the process that would govern its provision. Originality/value This framework would serve as a basis for establishing effective rules that would be credible, and that would properly balance the moral-hazard costs of emergency lending against the gains from avoiding systemic collapse of the financial system.

The Term Auction Facility (TAF) was designed by the Federal Reserve during the financial crisis to inject emergency short-term funds into banks, as a supplement to the lender of last resort discount window offerings. We describe how the Federal Reserve altered the design of the Term Auction Facility (TAF) over the course of the financial crisis and examine the utilization of this stand-alone facility. Most specifically we detail the impact of the greatly increased offering amounts in all auctions after October 2008, which resulted in the facility no longer auctioning scarcely available funds. We also document significantly different usage of the facility by FDIC-insured community and non-community banks, consistent with the notion of a two-tiered banking system in the U.S. Community banks were far less likely to use the facility than larger, non-community banks.

The liquidity crisis has beleaguered banks and has been bedeviling companies since 2009, after the introduction of the multi-currency system which has affected the Zimbabwean economic development. This research paper aims at investigating the causes of the liquidity crisis faced in the Zimbabwean economy. The study used survey design and researcher administered questionnaires in collecting data from the respondents located in Harare, Bulawayo, Gweru and Masvingo. Out of the 200 questionnaires issued, 150 were successfully completed and returned resulting in a response rate of 75%. The study also used secondary data obtained from government agencies on export and import performance. SPSS AMOS was used to test the hypothesis raised and generate a path model determining the size and strength of the direct and indirect influence between the predictor variables and the downstream variable. The study identifies the following antecedents of liquidity crisis; public and investor confidence, country risk, and externalization of funds, illicit financial flows, and net export performance as significant drivers that have an effect on the current liquidity crisis. The results showed that the absence of the lender of last resort role by the central bank has no significant contribution to the liquidity crisis currently obtaining. It is recommended that the government focuses on the aforementioned antecedents in order to address the liquidity crisis.

Purpose This paper aims to develop an instrument that helps in managing liquidity. Liquidity is one of the most critical issues to be considered by the financial management of the business firms to meet its financial obligations. It is more vital for banks because of the liquid nature of its assets and liabilities, along with the fact that the confidence in the bank and degree of risk depends heavily on liquidity as an indicator of its wellbeing. Islamic banks (IBs) look at the liquidity issue from the same side as the traditional banks. IBs – the most apparent Islamic financial institution – suffered from the problem of not benefiting from the lender of last resort that Central Banks (CBs) offer to traditional banks because IBs cannot borrow from the CBs at interest. The experience of Institution(s) offering Islamic Financial Services[1] (IIFS) regarding the establishment of Islamic money markets did not show a tangible success instead of the early studies done by some scholars. In spite of the rich experience of some countries in creating new money market instruments or configuration of the interest-based ones according to Islamic - Sharī’ah[2], the designs of these instruments have many limitations in terms of their tradability and flexibility, restricting their use for open-market operations by CBs. Design/methodology/approach The purpose of calculating the time weighted debt units (TWDUs) is to find the equivalent amount of money that the supplier can borrow to the lender in the future for a maturity that differs from the first credit contract. It is a swap between an amount of credit for a particular period of time and another amount for another period. The scheme are called traditionally as reciprocal (mutual) loans, reciprocal (mutual) deposits, swapped conditional loans and “I lend you, provided you lend me” (Hammad, 2010). It is also well known in Pakistan as time multiple counter loan (TMCL), and known within some Arabic IBs as specks (Nomar = numbers) system. This contract will be called the reciprocal loans in the current paper. Findings The current paper represents a blue print of suggested money market instrument (scheme) that is based on the idea of Al Qardh El Hasan (interest-free loan) – called TWDUs. This instrument does not promise any revenue for the supplier and no charge for the lender. Research limitations/implications The suggested model is known in traditional and contemporary writings of Islamic economists and - Sharī’ah scholars. It is accepted by many - Sharī’ah Boards in IBs (Merah, 2011) and was accepted by the Council of Islamic Ideology in Pakistan in 1980 through the TMCL. Despite that, it is still not discussed in depth by international - Sharī’ah boards as the International Islamic Fiqh Academy – in addition to the wide spread of opponent viewpoint that considers this contract as a kind of riba. Originality/value TWDUs is presumed to help IBs and other IIFS to add more flexibility in liquidity management in the side of risk management[3] (represented by the potential loss to IIFS arising from their inability either to meet their obligations or to fund increases in assets as they fall due without incurring unacceptable costs or losses) in addition to avoiding the case of hoarding surplus funds in the short term. Also, the suggested instrument will not be exclusive to IBs or IIFS; it can be developed to be used at a later stage by them as a mean of overdraft between IBs and their clients. Moreover, beside its viability to help in liquidity management for other firms in business sector (non-financial) or government agencies in liquidity management, TWDUs look for Islamic financial theory as an alternative to the traditional financial theory that is based on interest. Moreover, TWDUs is expected to play an important role in monetary policy in a totally Islamic financial system or even in a mixed one (Islamic and capitalistic).

We examine the financial conditions of dealers that participated in two of the Federal Reserve's lender-of-last-resort (LOLR) facilities—the Term Securities Lending Facility (TSLF) and the Primary Dealer Credit Facility (PDCF)—that provided liquidity against a range of assets during 2008–2009. Dealers with lower equity returns and greater leverage prior to borrowing from the facilities were more likely to participate in the programs, borrow more, and, in the case of the TSLF, at higher bidding rates. Dealers with less liquid collateral on their balance sheets before the facilities were introduced also tended to borrow more. The results suggest that both financial performance and balance sheet liquidity play a role in LOLR utilization.

Funding agency: Spanish government (grant nr: ECO2011-26308 and ECO2014-59262) We consider a dynamic model in which receiving support from the lender of last resort (LLR) may help banks to weather investor runs. We show the need for regulatory liquidity standards when the underlying social trade-offs make the uninformed LLR inclined to support troubled banks during a run. Liquidity standards increase the time available before the LLR must decide on supporting the bank. This facilitates the arrival of information on the bank's financial condition and improves the efficiency of the decision taken by the LLR, a role that can be modified but not replaced with the use of capital regulation. authorsversion published

This paper incorporates endogenous money creation into the liquidity mismatch problem of Diamond and Dybvig (1983). We characterize a nominal economy where demandable deposits are created through lending. Depositors use sight deposits to buy consumption goods and the banks manage reserves to clear payments and to offset liquidity risk. We show that deposit contracts are suboptimal in terms of liquidity risk-sharing. We also observe that self-fulfilling runs depend on the refinancing rate of the central bank. Our analysis emphasizes the importance of effective lender of last resort policies to prevent expectational banking panics., Rodríguez Mendizábal would like to acknowledge the financial support from the Spanish Ministry of Economy and Competitiveness, through the Severo Ochoa Programme for Centres of Excellence in R&D (SEV-2015-0563) and through grant ECO2016-76734-P (AEI/FEDER, UE) as well as that of the Generalitat de Catalunya through Grant 2017 SGR 1571. He is also grateful for financial support from the ADEMU project, “A Dynamic Economic and Monetary Union”, funded by the European Union's Horizon 2020 Program under grant agreement No 649396.

Recent years have witnessed the emergence and rapid growth of a large, diverse, and constantly evolving shadow payment system. The shadow payment platforms (SPPs) that populate this system perform many of the same core payment functions as conventional deposit-taking banks: including custody, funds transfer, and liquidity. The crucial difference is that SPPs operate outside the perimeter of bank regulation, thereby depriving customers of the deposit guarantee schemes, lender of last resort facilities, special resolution regimes, and other legal protections typically enjoyed by bank depositors. This paper represents the first attempt to map the global shadow payment system and identify what mechanisms, if any, SPPs use to protect their customers. Examining the business models and customer contracts of over 100 SPPs, we find that it is often difficult to ascertain information essential to evaluating levels of customer protection and, where such information is available, that customers generally enjoy relatively limited structural, contractual, or other private legal protections. This puts enormous pressure on public regulatory frameworks to ensure a sufficient level of consumer protection. Regrettably, we also find that the applicable regulatory frameworks in several key jurisdictions often provide a level of protection that is far below that enjoyed by bank depositors. These findings suggest that, at least from a consumer protection perspective, SPPs are currently not an effective substitute for bank-based payment systems.

Before the founding of the Federal Reserve, bank clearinghouse associations served as an emergency lending facility during the National Bank Era (1863–1913). This article clarifies the operation of clearinghouse loan certificates during panic periods. If clearinghouse loan certificates do not circulate among the general public, then they bear similarities to interbank loans among clearinghouse member banks. In general, the central clearinghouse organization does not act alone as a lender of last resort to make loans from the central clearinghouse to individual member banks.

This paper offers a historical perspective on the evolution of central banks as lenders of last resort (LOLR). Countries differ in the statutory powers of the LOLR, which is the outcome of a political bargain. Collateralized LOLR lending as envisioned by Bagehot (1873) requires five key legal and institutional preconditions, all of which required political agreement. LOLR mechanisms evolved to include more than collateralized lending. LOLRs established prior to World War II, with few exceptions, followed policies that can be broadly characterized as implementing “Bagehot's Principles”: seeking to preserve systemic financial stability rather than preventing the failure of particular banks, and limiting the amount of risk absorbed by the LOLR as much as possible when providing financial assistance. After World War II, and especially after the 1970s, generous deposit insurance and ad hoc bank bailouts became the norm. The focus of bank safety net policy changed from targeting systemic stability to preventing depositor loss and the failure of banks. Statutory powers of central banks do not change much over time, or correlate with country characteristics, instead reflecting idiosyncratic political histories.

We consider a model in which the threat of bank liquidations by creditors as well as equity-based compensation incentives both discipline bankers, but with different consequences. Greater use of equity leads to lower ex-ante bank liquidity, whereas greater use of debt leads to a higher probability of inefficient bank liquidation. The bank's privately-optimal capital structure trades off these two costs. With uncertainty about aggregate risk, bank creditors learn from other banks’ liquidation decisions. Such inference can lead to contagious liquidations, some of which are inefficient; this is a negative externality that is ignored in privately-optimal bank capital structures. Thus, under plausible conditions, banks choose excessive leverage relative to the socially optimal level, providing a rationale for bank capital regulation. While a blanket regulatory forbearance policy can eliminate contagion, it also eliminates all market discipline. However, a regulator generating its own information about aggregate risk, rather than relying on market signals, can restore efficiency and market discipline by intervening selectively.

Understanding why banks borrow from the Lender of Last Resort (LOLR) during a nancial crisis is crucial to understanding the macroeconomic impact of such largescale interventions. We document a strong divergence among banks’ take-up of LOLR assistance during the nancial crisis in the euro area, as banks which borrowed heavily also used increasingly risky collateral. We propose four explanations for this divergence

Term auction facility (TAF) was created during the financial crisis as a substitute for the Federal Reserve’s discount window, the lender of last resort. We hypothesize if TAF borrowing is viewed as a bailout then publicly traded banks would borrow relatively fewer TAF funds to avoid a bailout stigma. We find publicly traded banks did borrow less (as a percent of total assets) in the TAF program than privately held banks. Further, too-big-to-fail banks and investment banks borrowed relatively less than other publicly traded banks indicating greater levels of public scrutiny reduces borrowing under emergency government liquidity programs. We also find that publicly traded banks pledged lower quality and less liquid collateral than private banks when borrowing under the program. Our results suggest TAF provided more benefit to traditional privately held banks with strong balance sheets that were able to borrow relatively greater amounts in anticipation of either future liquidity needs as suggested by Ivashina and Scharfstein (J Financ Econ 97:319–338, 2010) or increased lending as found by Berger et al. (The Federal Reserve’s discount window and TAF programs: “pushing on a string?” Working paper, University of South Carolina, 2014).

© 2016 Edward Elgar Publishing Ltd. The international financial crisis of 2007/2008 and the ‘Great Recession’ that followed, along with the euro crisis, have highlighted a range of problems and difficulties that are related to some fundamental weaknesses of the euro. There are the well-known difficulties of macroeconomic policies under the Stability and Growth Pact and the more recent Fiscal Compact, including their deflationary nature and the ‘one size fits all problem’ of imposing common deficit requirements on all European Economic and Monetary Union countries. There are also problems with monetary policy in view of the fact that the European Central Bank does not properly possess the functions of a central bank, especially that of lender of last resort. We discuss the reforms that are needed, most important of which is the requirement for a substantial Economic and Monetary Union-level fiscal policy as part of political integration, along with a banking union. In this context the recent proposals of the ‘Five Presidents’ Report’ (European Commission 2015b; see, also, European Council 2012) are relevant and the question is whether they will save the euro. It is concluded that the ‘Five Presidents’ Report’ is unlikely to resolve the deep-seated problems, casting a dark shadow over the future of the euro.

This paper reviews the market failures that may justify the need for liquidity regulation, assesses whether liquidity regulation is a necessary complement to Lender of Last Resort (LOLR) policies, capital regulation and prompt corrective action, surveys the available evidence on the net benefits of liquidity regulation, and concludes by outlining research directions useful to improve bank regulation design.

We analyze banking crises and lending of last resort (LOLR) in a quantitative model of financial frictions with bank defaults. LOLR policies generate a tradeoff between financial fragility (due to more highly leveraged banks) and milder crises since the policies are effective once in a crisis. In the calibrated model, the crisis mitigation effect dominates the moral hazard problem and the economy is better off having access to a lender of last resort. We characterize the conditions under which pools of small economies can be sustainable LOLRs. In addition, we assess the ability of China - a country with ample reserves - to be a sustainable international LOLR.

During the 2008-09 financial crisis, the Federal Reserve established two emergency facilities for broker-dealers. One provided collateralized loans. The other lent securities against a pledge of other securities, effectively providing collateral upgrades, an operation similar to activities traditionally undertaken by broker-dealers. We find that these facilities alleviated dealers' funding pressures when access to repos backed by illiquid collateral deteriorated. We also find that dealers used the facilities, especially the ability to upgrade collateral, to continue funding their own illiquid inventories (avoiding potential fire-sales), and to extend funding to their clients. Exogenous variation in collateral policies at one facility allows a causal interpretation of these stabilizing effects.

The multi-trillion dollar market for, what was at that time wholly unregulated, over-the- counter derivatives (“swaps”) is widely viewed as a principal cause of the 2008 worldwide financial meltdown. The Dodd-Frank Act, signed into law on July 21, 2010, was expressly considered by Congress as a remedy for the deregulatory problems, in that market, that led to the crash. The legislation required the swaps market, subject to U.S. regulation, to comply with a host of business conduct and anti-competitive protections, including that the swaps market be fully transparent to U.S. financial regulators, collateralized, and capitalized. The statute also expressly provides that it would cover foreign subsidiaries of big U.S. financial institutions if their swaps trading could adversely impact the U.S. economy or represent an attempt to “evade” Dodd-Frank. In July 2013, the CFTC promulgated an 80 page, triple columned, and single-spaced “guidance” implementing Dodd-Frank’s extraterritorial reach, i.e., that manner in which Dodd- Frank would apply to swaps transactions executed outside the United States. The key point of that guidance was that “guaranteed” foreign subsidiaries of U.S. bank holding company swaps dealers were subject to all of Dodd-Frank’s swaps regulations wherever in the world those subsidiaries’ swaps were executed. At that time, the standardized industry swaps agreement contemplated that, inter alia, U.S. swaps dealers foreign subsidiaries would be “guaranteed” by their corporate parent, as was true since 1992. In August 2013, without notifying the CFTC, the principal swaps dealer trade association privately circulated to its member’s standard contractual language that would, for the first time, “deguarantee” foreign subsidiaries. By relying only on the obscure footnote 563 of the CFTC guidance’s 662 footnotes, the trade association assured its swaps dealer members that the newly deguaranteed foreign subsidiaries could (if they so choose) no longer be subject to Dodd-Frank. As a result, it has been reported (and also has been understood by many experts within the swaps industry) that a substantial portion of the U.S. swaps market has shifted from the large U.S. bank holding companies swaps dealers and their U.S. affiliates to their newly de- guaranteed “foreign” subsidiaries. The CFTC also soon discovered that these huge U.S. bank holding company swaps dealers, through their foreign subsidiaries, were “arranging, negotiating, and executing” these swaps in the United States with U.S. bank personnel and, only after execution in the U.S., were these swaps formally “assigned” to the U.S. banks’ newly “de- guaranteed” foreign subsidiaries with the accompanying claim that these swaps, even though executed in the U.S., were not covered by Dodd-Frank. In October 2016, the CFTC proposed a rule that would have closed these loopholes completely. However, the proposed rule was not finalized prior to the inauguration of President Trump. All indications are that it will never be finalized during a Trump Administration. Thus, as the tenth anniversary of the Lehman failure approaches, there is an understanding among many market regulators and swaps trading experts that large portions of the swaps market have moved from U.S. bank holding company swaps dealers to their newly deguaranteed foreign affiliates. However, what has not moved abroad is the very real obligation of the lender of last resort to rescue these U.S. swaps dealer bank holding companies if they fail because of poorly regulated swaps in their deguaranteed foreign subsidiaries, i.e., the U.S. tax- payer. While relief is unlikely to be forthcoming from either the Trump Administration or a Republican-controlled Congress, some other means will have to be found to avert another multi- trillion dollar bank bailout and/or financial calamity caused by poorly regulated swaps on the books of big U.S. banks. This paper notes that the relevant statutory framework affords state attorneys general and state financial regulators the right to bring so-called “parens patriae” actions in federal district court to enforce, inter alia, Dodd-Frank on behalf of a state’s citizens. That kind of litigation to enforce the statute’s extraterritorial provisions is now badly needed.

This article for the first time compares the Federal Reserve’ sp owers as lender of last resort (‘LLR’) and its ability to fight contagion, with its three major peers, the Bank of England (the ‘BOE’), the European Central Bank (the ‘ECB’) and the Bank of Japan (the ‘BOJ’). It concludes that the Federal Reserve (the ‘Fed’) is currently the weakest of the four, largely due to a hostile political environment for LLR powers, which are equated with bailouts, and restrictions placed by the 2010 Dodd–Frank Act on the Fed’s ability to loan to non-banks, whose role in the financial system is ever-increasing. This is a concern for the global as well as the US financial system, given the economic importance of the United States and the use of the dollar as a reserve currency. I. Background: The Fed and Dodd–Frank

Alexander Hamilton was the first U.S. Treasury Secretary from 1789 to 1795. When he started, the Federal Government was in default. During his tenure, U.S. Treasuries became the ultimate safe asset. He successfully managed expectations, achieved debt service reduction, and stabilized financial panics. He delivered sound public finances and financial stability. In the end, the U.S. possessed a modern financial system able to finance innovation and growth. At a time when Europe is working its way out of the sovereign debt crisis and implementing Banking Union and Financial Union, it is worthwhile to search for lessons from early U.S. history.

This paper analyses the issue of the dynamics of the TARGET2 system balances during the sovereign debt crisis, when some countries registered a decisive inflow of the central bank liquidity and others showed an outflow. The dynamics in the TARGET2 are here explained as being due to a fall in the level of confidence in the capacity of the Economic and Monetary Union to survive, rather than to disparities in the level of competitiveness among countries of the Eurozone. This crisis of confidence has to be considered as the consequence of the implicit refusal of the European institutions to create a mechanism working as lender of last resort for the euro area member States, indeed, only when the ECB took this responsibility by launching the Outright Monetary Transactions clear signs of improvement were observed in the sovereign debt crisis.