This paper develops a theoretical model which explains several stylized facts observed in the euro area interbank market after the collapse of Lehman Brothers in 2008. The model shows that if costs of participating in the interbank market are high, the central bank assumes an intermediary...

This paper develops a theoretical model which replicates main features of the euro overnight interbank market and the Eurosystem's operational framework, which has been in place since September 2008. Main ingredients of the model are frictions in the interbank market, a refinancing operation...

This paper analyzes a government's incentives to provide fi nancial assistance to a public bank which is hit by a liquidity shock. We show that discretionary decisions about emergency liquidity assistance result in either excessively small or excessively large liquidity injections in a wide...

Some stylized facts about transactions among banks are not easily reconciled with coinsurance of short-term liquidity risks. In our model, interbank markets play a different role. We argue that lending to another bank can reduce a bank's overall portfolio risk through diversification. If...