Re-Thinking the Lender of Last Resort

Abstract

Proceedings in this volume were prepared for a workshop which brought together a small group of academics, policy advisers and former and active central bankers at the Bank for International Settlements on 15 May 2014.

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.

While the full publication can be downloaded using the above link, individual contributions are available separately:

Overview

Rethinking the Lender of Last Resort: Workshop Summary

Keynote paper

The Lender of Last Resort and Modern Central Banking: Principles and Reconstruction

Lessons from the lender of last resort during the crisis

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

Lessons from Lender of Last Resort Actions During the Crisis: The Federal Reserve Experience

Lender of Last Resort Operations During the Financial Crisis: Seven Practical Lessons from the United Kingdom

Lending of Last Resort? A European Perspective

Lender of Last Resort: Actions, Results and Lessons from Mexico's Experience During the Crisis

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

Post-crisis changes in the financial system and their implications for central bank liquidity policies

Why Central Banking Should Be Re-Imagined

Is there a need to re-think the lender of last resort?

International Lender of Last Resort: Some Thoughts for the 21st Century

Can Emerging Economy Central Banks Be Market-Makers of Last Resort?

Towards an International Lender of Last Resort

JEL Classification: E58, F33