During the recent financial crisis, central banks have provided liquidity and governments have set up rescue programmes … bank suffering from liquidity shocks, we find that the unregulated bank keeps too much liquidity and monitors too little. A … central bank can alleviate the liquidity problem, but induces moral hazard. Therefore, we introduce an additional authority …

banks have provided liquidity and ministries of finance have set up rescue programmes to restore confidence and stability …. Using a model of a systemic bank suffering from liquidity shocks, we find that the unregulated bank keeps too much liquidity … and takes excessive risk compared to the social optimum. A Lender of Last Resort can alleviate the liquidity problem, but …