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The LOLR Policy and its Signaling Effect in a Time of Crisis
- Source :
- Journal of Financial Services Research. 57:231-252
- Publication Year :
- 2019
- Publisher :
- Springer Science and Business Media LLC, 2019.
-
Abstract
- 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.
- Subjects :
- 040101 forestry
Economics and Econometrics
Government
050208 finance
Lender of last resort
Moral hazard
business.industry
Creditor
media_common.quotation_subject
05 social sciences
Pooling
04 agricultural and veterinary sciences
Monetary economics
Accounting
0502 economics and business
Economics
0401 agriculture, forestry, and fisheries
Quality (business)
business
Welfare
Finance
Financial services
media_common
Subjects
Details
- ISSN :
- 15730735 and 09208550
- Volume :
- 57
- Database :
- OpenAIRE
- Journal :
- Journal of Financial Services Research
- Accession number :
- edsair.doi...........e9c4503c6b52ea8ccac055a6a8e07f64
- Full Text :
- https://doi.org/10.1007/s10693-019-00324-6