The object of this paper is to analyze rigorously the role of a Lender of Last Resort by providing a framework where the distinction between insolvency and illiquidity is not clearly cut. Determining the optimal Lender of Last Resort policy requires a careful modeling of the structure of the...

Twenty years ago, most banking courses focused on either management or monetary aspects of banking, with no connecting. Since then, a microeconomic theory of banking has developed, mainly through a switch of emphasis from the modeling of risk to the modeling of imperfect information. This...

Over the last thirty years, a new paradigm in banking theory has overturned economists' traditional vision of the banking sector. The asymmetric information model, extremely powerful in many areas of economic theory, has proven useful in banking theory both for explaining the role of banks in...

The classical Bagehot 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...

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...