We develop a theoretical model examining the financial stability policy of a central bank serving as both the lender of last resort and the regulator of the financial system. The model accommodates the possibility of financial contagion through interbank market linkages, and adverse feedback...

In his insightful and comprehensive review of the lender of last resort, Paul Tucker frames the discussion as one of how to best structure the provision of liquidity reinsurance. Because banks provide liquidity insurance in the form of both demandable deposits and callable credit lines, their...