We study the long standing issue of whether markets can supply banks with sufficient liquidity or whether markets should be complemented with a lender of last resort (LOLR). For this purpose, we develop an extended version of the recent model of Holmström and Tirole (1998) on the supply of...

In autumn of 2007 Britain experienced its first bank run of any significance since the reign of Queen Victoria. The run was on a bank called Northern Rock. This was extraordinary, for Britain had been free of such episodes because by early in the third quarter of the 19th century the Bank of...

We sketch a theoretical framework for comparing the properties of funded LOLR schemes. We construct an idealized lender of last resort and investigate how it formulates policy under alternative public and private governance structures. The alternatives are a (first-best) social utility maximizer...

This publication consists of fifteen studies on payment and settlement systems conducted using computational or simulation techniques. The studies have been presented at the simulator seminars arranged by the Bank of Finland during the years 2009–2011. The main focus of the studies is on the...

The paper concentrates on illustrating and assessing central banks’ liquidity operations during the crisis that started in August 2007. In addition to the ECB, the central banks of Sweden, Switzerland, the United Kingdom, Australia, Japan, Canada and the United States are analyzed. During the...

The paper considers a model in which limited liability causes an asset substitution problem for banks. The problem can at times become so severe that the current regulatory framework – based on a combination of effectively full deposit insurance, minimum capital requirements and prudential...

The aim of this research is to provide new insights about the limits of borrowing. The second chapter contributes to the theory of limits of borrowing by a study of LOLRs in an original model. The third chapter introduces a new approach to test and measure the limits of borrowing...

Failure in bank corporate governance has been seen as a contributing factor to excessive risk-taking pre-crisis with devastating implications as risks realised during the financial crisis. Unfortunately, the empirical evidence on the impact of managerial incentives on bank crisis performance is...

We model a banker's future bonuses as a series of call options on the bank's profits and show that bonus caps and deferrals reduce risk-taking. However, the banker's optimal risk-taking also depends on the costs of risk-taking. We calibrate the model to US banking data and show that lengthening...