07-18-2014, 01:50 PM
The Unique Role of Depository Institutions
Depository institutions receive a disproportionate amount of attention from government regulators because They play a central role in the economy They face a unique set of problems We all rely heavily on banks for access to the payments system Banks are also prone to runs, as they hold illiquid assets to back their liquid liabilities,promising full and constant value to the depositors based on assets of uncertain value They are linked to each other both on their balance sheets and in their customers' minds;This in terconnectedness of banks is almost unique to the financial industry
The Government as Lender of Last Resort
The best way to stop a bank failure from turning into a panic is to make sure solvent institutionscan meet their depositors' withdrawal demandsThe existence of a lender of last resort significantly reduces, but does not eliminate, contagionFor the system to work, central bank officials who approve the loan applications must be able todistinguish an illiquid from an insolvent institutionIt is important for a lender of last resort to operate in a manner that minimizes the tendency forbankers to take too much risk in their operations
Depository institutions receive a disproportionate amount of attention from government regulators because They play a central role in the economy They face a unique set of problems We all rely heavily on banks for access to the payments system Banks are also prone to runs, as they hold illiquid assets to back their liquid liabilities,promising full and constant value to the depositors based on assets of uncertain value They are linked to each other both on their balance sheets and in their customers' minds;This in terconnectedness of banks is almost unique to the financial industry
The Government as Lender of Last Resort
The best way to stop a bank failure from turning into a panic is to make sure solvent institutionscan meet their depositors' withdrawal demandsThe existence of a lender of last resort significantly reduces, but does not eliminate, contagionFor the system to work, central bank officials who approve the loan applications must be able todistinguish an illiquid from an insolvent institutionIt is important for a lender of last resort to operate in a manner that minimizes the tendency forbankers to take too much risk in their operations
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