Abstract - Optimal Lender of Last Resort Policies in Different Financial Systems

In a framework closely related to Diamond and Rajan (2001) we characterize different financial systems and analyze the welfare implications of different LOLR-policies in these financial systems.
We show that in a bank-dominated ¯nancial system it is less likely that a LOLR-policy that follows the Bagehot rules is preferable. In financial systems with rather illiquid assets a discretionary individual liquidity assistance might be welfare improving, while in market-
based ¯nancial systems, with rather liquid assets in the banks balance sheets, emergency liquidity assistance provided freely to the market at a penalty rate is likely to be efficient.
Thus, a "one size fits all"-approach that does not take the differences of financial systems into account is misguiding.

Marcel Tyrell
Department of Finance, Goethe-University Frankfurt/Main (Germany)
30.Nov 2004

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