The object of this paper is to analyze rigorously the role of a Lender of Last Resort by providing a framework where the distinction between insolvency and illiquidity is not clearly cut. Determining the optimal Lender of Last Resort policy requires a careful modeling of the structure of the...

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...