Lender of Last Resort
A lender of last resort (LoLR) is an institution, usually the central bank (CB) or a public deposit insurer (DI), which offers emergency financial assistance to commercial banks particularly during a financial crisis. In most cases, financial assistance means provision of liquidity to a single financial institution or to the financial market as a loan (liquidity assistance), usually against first-class collateral. Sometimes, the LoLR also recapitalizes commercial banks and provides risk-capital support that has not to be paid back (bank bailout).
The need for a CB to provide liquidity assistance was first mentioned by Henry Thornton (1802/1939) and advanced byWalter Bagehot (1873) who elaborated the9 principles applied to a policy of an LoLR. He proposed that the Bank of England should announce in advance its readiness to lend against collateral any amount to an illiquid but solvent financial institution at a penalty rate of interest. Bagehot suggested that during a...
- Bagehot W (1873) Lombard street: a description of the money market. Dodo Press, London (reprint)Google Scholar
- Bordo MD (1990) The lender of last resort: alternative views and historical experience. Fed Reserve Bank Richmond Econ Rev. 18–29 Jan/FebGoogle Scholar
- Eisenschmidt J, Tapking J (2009) Liquidity risk premia in unsecured interbank money markets. European Central Bank working paper 1025Google Scholar
- Freixas X (2000) Optimal bail out policy, conditionality and constructive ambiguity. Netherlands Central Bank, DNB staff reports 49, AmsterdamGoogle Scholar
- Gropp R, Hakenes H, Schnabel I (2010) Competition, risk-shifting, and public bail-out policies. Rev Financ Stud 25(8):2343–2380Google Scholar
- Heider F, Hoerova M, Holthausen C (2009) Liquidity hoarding and interbank market spreads: the role of counterparty risk. European Central Bank working paper 1126Google Scholar
- Nakaso H (2001) The financial crisis in Japan during the 1990s: how the Bank of Japan responded and the lessons learnt. BIS papers no 6, BaselGoogle Scholar
- Petrovic A, Tutsch R (2010) National rescue measures in response to the current financial crisis. European Central Bank, legal working paper series no 8, Frankfurt/MainGoogle Scholar
- Repullo R (2005) Liquidity, risk taking, and the lender of last resort. Int J Cent Bank 2(2):47–80Google Scholar
- Thornton H (1802/1939) An enquiry into the nature and effects of the paper credit of Great Britain (ed with an introduction by FA von Hayek). George Allen and Unwin, LondonGoogle Scholar