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Title:Monitoring, liquidity provision and financial crisis risk PDF Logo
Authors:Mundaca, B. Gabriela
Issue Date:2007
Series/Report no.:Memorandum, Department of Economics, University of Oslo 2007,04
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.
Subjects:Monitoring
bailouts
banking crises
commitments
conditionality
JEL:E58
G21
G28
G38
Document Type:Working Paper
Appears in Collections:Memorandum, Department of Economics, University of Oslo

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