We analyse credit market equilibrium when banks screen loan applicants. When banks have a convex cost function of screening, a pure strategy equilibrium exists where banks optimally set interest rates at the same level as their competitors. This result complements Broecker’s (1990) analysis,...

This paper analyses the impact of asymmetric information in the interbank market and establishes its crucial role in the microfoundations of the monetary policy transmission mechanism. We show that interbank market imperfections induce an equilibrium with rationing in the credit market. This has...

This note elaborates on a recent article by Chan, Greenbaum and Thakor (1992) who contend that fairly priced deposit insurance is incompatible with free competition in the banking sector, in the presence of adverse selection. We show here that at soon as one introduces a real economic motivation...

The increased fragility of the banking industry has generated growing concern about the risks associated with the payment systems. Although in most industrial countries different interbank payment systems coexist, little is really known about their propierties in terms of risk and efficiency. We...

We analyze risk sensitive incentive compatible deposit insurance in the presence of private information when the market value of deposit insurance can be determined using Merton's (1997) formula. We show that, under the assumption that transferring funds from taxpayers to financial institutions...

We model systemic risk in an interbank market. Banks face liquidity needs as consumers are uncertain about where they need to consume. Interbank credit lines allow to cope with these liquidity shocks while reducing the cost of maintaining reserves. However, the interbank market exposes the...

This paper addresses the issue of the optimal behaviour of the Lender of Last Resort (LOLR) in its microeconomic role regarding individual financial institutions in distress. It has been argued that the LOLR should not intervene at the microeconomic level and let any defaulting institution face...

While domestic interbank markets are often considered to work in an efficient way, cross-country bank lending appears to be subjected to market imperfections leading to persistent interest rate differentials. In a model where banks need to cope with liquidity shocks by borrowing or by...

During the last decades a consensus has emerged that it is impossible to disentangle liquidity shocks from solvency shocks. As a consequence the classical lender of last resort rules, as defined by Thornton and Bagehot, based on lending to solvent illiquid institutions appear ill-suited to this...