200 - What Institutional Structure for the Lender of Last Resort?

DNB Working Papers
Publicatiedatum 18 februari 2009

This paper develops a game theory model to analyze the optimal structure of the Lender of Last Resort in Europe. When depositors are imperfectly informed, the indifference to international transmission displayed by national authorities has value. A centralized authority, because it internalizes externalities, faces a pooling equilibrium. It cannot effectively signal the motivation behind its interventions. This leads to unnecessary depositor scares. The first-best is achieved by delegation: the central authority decides when to retain control and when to delegate to the national authorities. Central coordination dominates pure centralization. Keywords: Lender of Last Resort, Bailout, Delegation, Contagion, Centralization. JEL Classification: D82, G21, G28