Central Banks as Lender of Last Resort: Experiences During the 2007-2010 Crisis and Lessons for the Future

34 Pages Posted: 11 Jan 2015

See all articles by Dietrich Domanski

Dietrich Domanski

Bank for International Settlements (BIS)

Richhild Moessner

Bank for International Settlements (BIS)

William R. Nelson

Board of Governors of the Federal Reserve System

Date Written: December 29, 2014

Abstract

During the 2007-2010 financial crisis, central banks accumulated a vast amount of experience in acting as lender 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 emergency liquidity assistance since 2007 has largely adhered to Bagehot's dictums of lending freely against good collateral to solvent institutions at a penalty rate. But there were many exceptions to these rules. 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.

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

JEL Classification: E58, F31, N1

Suggested Citation

Domanski, Dietrich and Moessner, Richhild and Nelson, William Richard, Central Banks as Lender of Last Resort: Experiences During the 2007-2010 Crisis and Lessons for the Future (December 29, 2014). FEDS Working Paper No. 2014-110. Available at SSRN: https://ssrn.com/abstract=2544645 or http://dx.doi.org/10.2139/ssrn.2544645

Dietrich Domanski

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Richhild Moessner

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

William Richard Nelson (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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