This paper establishes a theoretical model to examine the LOLR policy when a central bank cannot distinguish between solvent and insolvent banks. We study two cases: a case where the central bank cannot screen insolvent banks and a case where the central bank can only imperfectly screen...

We show that on-demand insurance contracts, an innovative form of coverage recently introduced through the InsurTech sector, can serve as a screening device. To this end, we develop a new adverse selection model consistent with Wilson (1977), Miyazaki (1977) and Spence (1978). Consumers have...

We provide an economic analysis of forum selection in international business contracts. International business contracts or multi-state transactions within federally structured countries might be subject to more than one sovereign adjudication system. In case of conflict between the transacting...

After the 2008 financial crash governments and central banks had to rescue banks which had become insolvent or illiquid, and whose failure threatened the Western financial system. The bill for this taxpayer funded bailout came to over USD 20 trillion globally, including assistance from US, EU,...

This paper studies the relationship between government bailouts and bank risk taking. We show that the impact of government bailouts (in the form of liquidity injections) on bank risk taking, depends on the exogenous level of systematic risk. In a model where the output follows a geometric...

We examine whether the economy can be insured against banking crises with deposit and loan contracts contingent on macroeconomic shocks. We study banking competition and show that the private sector insures the banking system through such contracts, and banking crises are avoided, provided that...

On 16th November 2009, SUERF, CEPS and the Belgian Financial Forum coorganized a conference "Crisis management at cross-roads" in Brussels. All papers in the present volume are based on contributions at the conference and the SUERF Annual Lecture which followed the event.

In this paper I ask whether a central bank policy of providing liquidity to banks during panics can prevent bank runs without causing moral hazard. This kind of policy has been widely advocated, most notably by Bagehot (1873). To analyze such a policy, I build a model with three key features: 1)...

This paper focuses on the size of the borrower group in group lending. We show that, when social ties in a community enhance borrowers’ incentives to exert effort, a profit-maximizing financier chooses a group of limited size. Borrowers that would be fundable under moral hazard but have...