A Lender of Last Resort for Public Banks? Theory and an Application to Japan Post Bank

Abstract

This paper analyzes different regulatory arrangements for public banks in a liquidity crisis and applies the results to the current privatization process of Japan Post Bank (JPB). We show that under suitably designed recapitalization rules, social welfare is higher than under discretion. For the latter case, we derive conditions under which the central bank or the deposit insurer should act as lender of last resort (LLR). Moreover, we report details of JPB privatization and show that in case of a liquidity crisis of JPB, the current allocation of the LLR function to the Bank of Japan is inefficient.