Central Banks as Lenders of Last Resort: Experiences During the 2007-10 Crisis and Lessons for the Future

Abstract

During the 2007-10 financial crisis, central banks accumulated a vast amount of experience in acting as lenders of last resort. This paper reviews the various ways that central banks provided emergency liquidity assistance (ELA) during the crisis, and discusses issues for the design of ELA arising from that experience. In a number of ways, the ELA since 2007 has largely adhered to Bagehot's dictum of lending freely at a penalty rate to solvent institutions against good collateral. But there were many exceptions to these principles. Those exceptions illuminate the situations where the lender of last resort role of central banks is most difficult. They also highlight key challenges in designing lender of last resort policies going forward.

Full publication: Re-Thinking the Lender of Last Resort

Keywords: Banking crisis, central bank liquidity, lender of last resort

JEL Classification: E58, F31, N1