Liquidity in the financial crisis: New insights on the lender of last resort
Pierre-Olivier Weill, Guillaume Rocheteau, Ricardo Lagos 16 December 2009
Following the last run on a British bank over 130 years ago, Walter Bagehot argued that central banks should act as a lender of last resort. While such policies have been followed by central banks in today’s crisis, this column updates the recommendation by suggesting central banks should also act as a “liquidity provider of last resort”.
Under every central banker’s bed is a copy of “Lombard Street” by Walter Bagehot. Published in 1873, it argues that the central bank should act as a lender of last resort during crises to ensure that financial intermediaries have the resources to provide liquidity in asset markets. The name comes from the London base of Overend, Gurney and Company who in 1866 were the subject of the last run on a British bank before Northern Rock in 2007.
Central Banks, Federal Reserve, global crisis, ponetary policy