One important lesson of the crisis is the need to take a systemic view of measures aimed at financial stability. Measures that enhance the stability of a single institution could be inimical to the stability of the financial system as a whole

During the last decades a consensus has emerged that it is impossible to disentangle liquidity shocks from solvency shocks. As a consequence the classical lender of last resort rules, as defined by Thornton and Bagehot, based on lending to solvent illiquid institutions appear ill-suited to this...

This paper develops a model of the lender of last resort. It provides an analytical basis for too big too fail and a rationale for constructive ambiguity. Key results are that if contagion (moral hazard) is the main concern, the Central Bank (CB) will have an excessive (little) incentive to...