Allocating Bank Regulatory Powers: Lender of Last Resort, Deposit Insurance and Supervision

Allocating Bank Regulatory Powers: Lender of Last Resort, Deposit Insurance and Supervision

We examine the optimal institutional allocation of bank regulation. We find that centralizing the lending of last resort and deposit insurance functions in a regulator leads to excessive forbearance. It also leads the bank to invest suboptimaly in loans. Giving this regulator supervision improves on both problems, but it still does not lead to the efficient outcome.

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