Revisiting the central bank's lender of last resort function
Joost Bats (),
Jan Willem End () and
DNB Occasional Studies from Netherlands Central Bank, Research Department
During the global financial crisis which started in 2007 (henceforth: crisis), central banks provided extended liquidity support, both to individual institutions and financial markets more broadly. These measures were taken as part of the lender of last resort (LOLR) function of the central bank, which can be activated in response to various kinds of liquidity risk. In times of systemic liquidity stress, when markets do not function properly and liquidity buffers fall short, a larger intermediary role of the central bank is warranted. Extended liquidity supply by the central bank can then underpin the intermediary function of the financial system to ensure the continuation of critical economic processes. In a systemic crisis, supporting financial stability is tantamount to safeguarding the monetary transmission process and thus, ultimately, also ensuring price stability.
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