Almost every country in the world has sophisticated systems to prevent banking crises. Yet such crises--and the massive financial and social damage they can cause--remain common throughout the world. Does deposit insurance encourage depositors and bankers to take excessive risks? Are banking...

The classical doctrine of the Lender of Last Resort, elaborated by Thornton (1802) and Bagehot (1873), asserts that the Central Bank should lend to „illiquid but solvent“ banks under certain conditions. Several authors have argued that this view is now obsolete: when interbank markets are...

We analyze the consequences of activism in a regulated industry where the regulator has been captured by the industry. Unlike ordinary economic agents, activists are insensitive to monetary incentives. Moreover, they are less well informed than regulators and their actions generate dead-weight...

This paper studies the efficient pricing of large-value payment systems in the presence of unobservable heterogeneity about banks' future payment volumes. It is shown that the optimal pricing scheme for a public monopoly system involves quantity discounts in the form of a decreasing marginal...

The classical Bagehot’s conception of a Lender of Last Resort (LOLR) that lends to illiquid banks has been criticized on two grounds: on the one hand, the distinction between insolvency and illiquidity is not clear cut; on the other a fully collateralized repo market allows Central Banks to...

We study optimal pricing rules for a public large-value payment system (LVPS) that produces a public good (like prevention of systemic risk) but faces competition by a private LVPS for the private provision of large value payments. We show that the marginal cost of the public LVPS has to be...

We build a model of credit card pricing that explicitly takes into account credit functionality. We show that a monopoly card network always selects an interchange fee that exceeds the level that maximizes consumer surplus. If regulators only care about consumer surplus, a conservative...

We argue that risk sharing motivates the bank-wide structure of bonus pay. In the presence of financial frictions that make external financing costly, the optimal contract between shareholders and employees involves some degree of risk sharing whereby bonus pay partially absorbs earnings shocks....

The paper investigates, in a non-technical fashion, the economic determinants of interchange fees in payment card systems and the potential need for their regulation. Among other things, it demonstrates that the proposal for a cost-based regulation of interchange fees relies on an erroneous,...