This paper develops an infinite-horizon model of financial institutions that borrow short-term and invest in long-term assets that can be traded in frictionless markets. Because these financial intermediaries perform maturity transformation, they are subject to potential runs. We derive distinct...

A lesson of the recent financial crisis is that the interbank market is crucial for banks facing uncertainty regarding their liquidity needs. This article studies the efficiency of the interbank market in allocating funds. We show that the central bank should lower the interbank rate when...

In a simple search model of money, we study a special kind of memory which gives rise to an arrangement resembling a payment network. Specifically, we assume that agents can pay a cost to have access to a central data base which keeps track of payments made and received. Incentives must be...

We study two designs for a liquidity-saving mechanism (LSM), a queuing arrangement used with an interbank settlement system. With a balance-reactive LSM, banks can set a balance threshold below which payments are not released from the queue, an action not possible with a receipt-reactive LSM....

This paper studies the incentives of participants in a real-time gross settlement system with and without the addition of a liquidity-saving mechanism (LSM). Participants in the model face a liquidity shock and different costs for delaying payments. They trade off the cost of delaying a payment...

A regulator resolving a bank faces two audiences: depositors, who may run if they believe the regulator will not provide capital, and banks, which may take excess risk if they believe the regulator will provide capital. When the regulator's cost of injecting capital is private information, it...

Financial crises are associated with reduced volumes and extreme levels of rates for term inter-bank loans, reflected in one-month and three-month LIBOR. We explain such stress by modeling leveraged banks' precautionary demand for liquidity. Asset shocks impair a bank's ability to roll over debt...

Financial crises are associated with reduced volumes and extreme levels of rates for term inter-bank transactions, such as in one-month and three-month LIBOR markets. We provide an explanation of such stress in term lending by modelling leveraged banks’ precautionary demand for liquidity. When...