Central bank has reserves of dollars but unlike Fed it cannot create them Run

Central bank has reserves of dollars but unlike fed

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Central bank has reserves of dollars, but unlike Fed it cannot create them Run on a bank: depositors all withdrawal money at the same time, demand for liquidity In liquidation- assets sold off in a hurry may fetch only prices well below their value If others run on a bank you should too Multiple bank runs result in a bank panic Factors that make a liquidity crisis more likely o Financial crises and the business cycle’ o Industry cycle o The strains of increasing competition Fragmentation reduces stability- less pooling for small banks Internal methods for dealing with liquidity= asset management External methods= liability management o External methods increase efficiency but reduce stability because it relies on pooling Vehicle for self-regulation was generally the clearing house association Private guarantee funds issue: o Not sufficiently credible o Cannot guarantee liquidity o Moral hazard (happens with public or private) institution will be riskier gov. has advantage in relation to the first two problems, gov. can create as much money as it wants o lender of last resort- gov. institution that can provide liquidity in crisis Lender of last resort should: o Lend only against good collateral (help illiquid banks not insolvent ones) o Accept all good collateral (helps distinguish good banks from bad banks) o Charge a penalty rate of interest on its loans (insures last resort is really lender of last resort) o Policies should be made known to the public (public needs to know there is one to max. benefit) Insolvent if assets are worth less than liabilities Borrowing from Fed is the discount window and the rate charged is the discount rate o Discount rate is usually below market rates, to prevent banks from borrowing too much the Fed rations amount each bank can borrow.
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  • Fall '19
  • Federal Reserve System, FDIC

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