Re-thinking the lender of last resort

Bank for International Settlements

No 79 in BIS Papers from Bank for International Settlements

Abstract: The lender of last resort (LOLR) is perhaps the most controversial role of a central bank. On the one hand, providing emergency liquidity assistance to financial institutions is a core central bank responsibility, given its unique ability to create liquid assets in the form of central bank reserves, its central position within the payment system, and its macroeconomic stabilisation objective. On the other hand, acting as LOLR is seen as very risky, potentially creating moral hazard on a massive scale, exposing the central bank to large financial risks, and blurring the boundary with fiscal policy. Moreover, liquidity assistance to individual institutions is typically deeply unpopular, creating reputation risks. The financial crisis has served as reminder of the critical importance of the LOLR in restoring financial stability. But it has also raised fundamental questions about the design of LOLR frameworks and the execution of LOLR policies. How to strike the right balance between limiting risks for central banks and ensuring that the LOLR function can be performed effectively when needed? Should central banks be ambiguous in public about the terms and conditions of liquidity support? Or is there a case for well-articulated LOLR policies communicated ex ante as part of a broader financial stability framework? The aim of the BIS workshop was to explore issues related to the future design of LOLR policies, including governance, operational arrangements, and international aspect. The discussions in this volume do not, of course, converge on simple answers. They do, however, underscore the importance of careful consideration of the articulation of the LOLR function going forward.

Date: 2014 Written 2014-09
ISBN: 978-92-9131-728-8
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

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Chapters in this book:

Rethinking the lender of last resort: workshop summary , pp 1-9

Dietrich Domanski and Vladyslav Sushko

The lender of last resort and modern central banking: principles and reconstruction , pp 10-42

Paul Tucker

Central banks as lenders of last resort: experiences during the 2007-10 crisis and lessons for the future , pp 43-75

Dietrich Domanski, Richhild Moessner and William Nelson

Lessons from lender of last resort actions during the crisis: the Federal Reserve experience , pp 76-80

William Nelson

Lender of last resort operations during the financial crisis: seven practical lessons from the United Kingdom , pp 81-92

Andrew Hauser

Lending of last resort? A European perspective , pp 93-96

Francesco Papadia

Lender of last resort: actions, results and lessons from Mexico's experience during the crisis , pp 97-105

José Julián Sidaoui

Lessons from Bank of Japan's experience during the banking crises of the 1990s and the new dimension to LOLR stemming from the global financial crisis , pp 106-107

Hiroshi Nakaso

Why central banking should be re-imagined , pp 108-118

Perry Mehrling

International lender of last resort: some thoughts for the 21st century , pp 119-127

Jean-Pierre Landau

Can emerging economy central banks be market-makers of last resort? , pp 128-130

Michael Dooley

Towards an international lender of last resort , pp 131-136

Stephen Cecchetti

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