Political Foundations of the Lender of Last Resort: A Global Historical Narrative

76 Pages Posted: 27 Jul 2016

See all articles by Charles W. Calomiris

Charles W. Calomiris

Columbia University - Columbia Business School; National Bureau of Economic Research (NBER)

Marc Flandreau

Centre for Economic Policy Research (CEPR)

Luc Laeven

European Central Bank (ECB); Centre for Economic Policy Research (CEPR)

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Date Written: July 26, 2016

Abstract

This paper offers a historical perspective on the evolution of central banks as lenders of last resort (LOLR). Countries differ in the statutory powers of the LOLR, which is the outcome of a political bargain. Collateralized LOLR lending as envisioned by Bagehot (1873) requires five key legal and institutional preconditions, all of which required political agreement. LOLR mechanisms evolved to include more than collateralized lending. LOLRs established prior to World War II, with few exceptions, followed policies that can be broadly characterized as implementing “Bagehot’s Principles”: seeking to preserve systemic financial stability rather than preventing the failure of particular banks, and limiting the amount of risk absorbed by the LOLR as much as possible when providing financial assistance. After World War II, and especially after the 1970s, generous deposit insurance and ad hoc bank bailouts became the norm. The focus of bank safety net policy changed from targeting systemic stability to preventing depositor loss and the failure of banks. Statutory powers of central banks do not change much over time, or correlate with country characteristics, instead reflecting idiosyncratic political histories.

Keywords: Lender of last resort, financial crises, bank runs, central banks

JEL Classification: G20

Suggested Citation

Calomiris, Charles W. and Flandreau, Marc and Laeven, Luc A., Political Foundations of the Lender of Last Resort: A Global Historical Narrative (July 26, 2016). Columbia Business School Research Paper No. 16-51, Available at SSRN: https://ssrn.com/abstract=2814513 or http://dx.doi.org/10.2139/ssrn.2814513

Charles W. Calomiris

Columbia University - Columbia Business School ( email )

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National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Marc Flandreau

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Luc A. Laeven (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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