ECB paper models effects of bank guarantees
Guarantees improve welfare by increasing liquidity transformation, researchers find
A working paper published by the European Central Bank examines whether government guarantees to banks improves welfare.
In Government guarantees and financial stability, Franklin Allen, Elena Carletti, Itay Goldstein and Agnese Leonello model the effects of two types of guarantee schemes on banks’ stability.
The first aims only at avoiding “panic-driven” threats to banks’ liquidity, by guaranteeing minimum repayments to all depositors if the bank is solvent. The second scheme guarantees
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