Releasing liquidity can encourage banks’ ‘gambling’, ECB paper argues

ECB paper analyses Portuguese authorities’ response to banking crisis

Euro sign, Frankfurt

A working paper published by the European Central Bank says Portuguese policy-makers faced difficult problems in dealing with the crisis in the countries’ banks.

In Gambling traps, Anil Ari outlines a model “in which strategic interactions between banks and depositors may lead to endogenous bank fragility and slow recovery from crises”.

Bad equilibria can occur in which banks pursue risky investment strategies in order to meet higher funding costs. The funding costs in turn make it hard for

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