Deposit Insurance and Lender-of-Last-Resort Functions

Abstract

We consider issues concerning the design of a banking system safety net when both a deposit insurer and a lender of last resort are present. In our model both entities have a role to play. Moreover, issues related to deposit insurance pricing are relatively unimportant in this context, whereas issues related to discount window access and pricing are not. We discuss when and why (or why not) a lender of last resort should lend liberally but charge high rates of interest. And, we raise the possibility that discount window policy may enhance or reduce the scope for multiplicity of equilibria.