Law Commons^™

Guarantor Of Last Resort, Kathryn Judge

Faculty Scholarship

The optimal response to a financial crisis entails addressing two, often conflicting, demands: stopping the panic and starting the clock. When short-term depositors flee, banks can be forced to sell assets at fire-sale prices, causing credit to contract and real economic activity to decline. To reduce these adverse spillover effects, policymakers routinely intervene to stop systemic runs. All too often, however, policymakers deploy stopgap measures that allow the underlying problems to fester. To promote long-term economic health, they must also ferret out the underlying problems and allocate the losses that cannot be avoided. A well-designed guarantor of last resort can …

Moneys' Legal Hierarchy, Katharina Pistor

Faculty Scholarship

This chapter discusses the way in which money is legally constructed and hierarchically structured. In financial markets, participants trade different forms of money, some of which is state-issued and some privately issued. A form of money is closer to the “apex” of the system the closer it is to entities that can issue liquid means or determine acceptable forms of payment, such as central banks and governments. During financial crises, market participants close to the “apex” are systematically advantaged. Various legal devices, e.g. property rights, collateral rights, or trust law, contribute to hierarchically structuring the financial system, by granting preferential …

The First Year: The Role Of A Modern Lender Of Last Resort, Kathryn Judge

Faculty Scholarship

Insufficient liquidity can trigger fire sales and wreak havoc on a financial system. To address these challenges, the Federal Reserve (the Fed) and other central banks have long had the authority to provide financial institutions liquidity when market-based sources run dry. Yet, liquidity injections sometimes fail to quell market dysfunction. When liquidity shortages persist, they are often symptoms of deeper problems plaguing the financial system.

This Essay shows that continually pumping new liquidity into a financial system in the midst of a persistent liquidity shortage may increase the fragility of the system and, on its own, is unlikely to resolve …