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The LOLR Policy and its Signaling Effect in a Time of Crisis
Journal of Financial Services Research ( IF 1.491 ) Pub Date : 2019-10-29 , DOI: 10.1007/s10693-019-00324-6
Mei Li , Frank Milne , Junfeng Qiu

When a government implements an LOLR policy during a crisis, creditors can infer a bank’s quality by whether the bank borrows government loans. We establish a formal model to study an LOLR policy in the presence of this signaling effect. We find that three equilibria exist: a separating equilibrium where only low quality banks borrow from the government and two pooling equilibria where both high and low quality banks do and do not borrow from the government. Further, we find that the government’s lending rate serves an important signaling role and that hiding the identity of the banks that borrow government loans tends to encourage banks to do so. We also find two welfare effects of the LOLR policy: the liquidation cost saving and moral hazard. Depending on which effect dominates, the optimal LOLR policy differs.

中文翻译:

LOLR 政策及其在危机时期的信号效应

当政府在危机期间实施 LOLR 政策时,债权人可以通过银行是否借入政府贷款来推断银行的质量。我们建立了一个正式模型来研究存在这种信号效应的 LOLR 策略。我们发现存在三个均衡:一个是分离均衡,其中只有低质量银行从政府借款,两个池均衡,其中高质量和低质量银行都向政府借款和不向政府借款。此外,我们发现政府的贷款利率起着重要的信号作用,隐藏借入政府贷款的银行的身份往往会鼓励银行这样做。我们还发现 LOLR 政策的两个福利效应:清算成本节省和道德风险。根据哪种效果占主导地位,最佳 LOLR 策略会有所不同。
更新日期:2019-10-29
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