Memorandum,
Oslo University, Department of Economics

Abstract: This paper analyzes central bank policies on monitoring banks in distress when liquidity provisions are conditional on performance and a bad shock occurs. A sequential game model is used to analyze two policies: one in which the central bank acts with discretion and the second in which the optimal monitoring policy rule is made public. The results show that banks exert less effort and take higher risks with discretionary monitoring policy. With public information about monitoring rules, there is more central bank monitoring and less need to provide emergency financing. Public information about monitoring resolves the multiple equilibria that arise with discretion and a unique equilibrium emerges where the probability of banking crisis is reduced.

Keywords: Monitoring; bailouts; banking crises; commitments; conditionality

JEL-codes: E58; G21; G28; G38

33 pages, First version: January 10, 2007. Revised: March 1, 2009.

Full text files

Memo-04-2007.pdf  

Download statistics

• Oslo University, Department of Economics
• Ordering Working Papers
• Home page for this series

Questions (including download problems) about the papers in this series should be directed to Mari Strønstad Øverås ()
Report other problems with accessing this service to Sune Karlsson ().

RePEc:hhs:osloec:2007_004This page generated on 2024-09-13 22:16:45.