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Central banks as lender of last resort: experiences during the 2007-2010 crisis and lessons for the future

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  • Dietrich Domanski
  • Richhild Moessner
  • William R. Nelson

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.

Suggested Citation

  • Dietrich Domanski & Richhild Moessner & William R. Nelson, 2014. "Central banks as lender of last resort: experiences during the 2007-2010 crisis and lessons for the future," Finance and Economics Discussion Series 2014-110, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2014-110
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    References listed on IDEAS

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    1. William Allen & Richhild Moessner, 2010. "Central bank co-operation and international liquidity in the financial crisis of 2008-9," BIS Working Papers 310, Bank for International Settlements.
    2. Patrick McGuire & Goetz von Peter, 2012. "The Dollar Shortage in Global Banking and the International Policy Response," International Finance, Wiley Blackwell, vol. 15(2), pages 155-178, June.
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    4. Richhild Moessner & William A Allen, 2010. "Banking crises and the international monetary system in the Great Depression and now," BIS Working Papers 333, Bank for International Settlements.
    5. Cheun, Samuel & von Köppen-Mertes, Isabel & Weller, Benedict, 2009. "The collateral frameworks of the Eurosystem, the Federal Reserve System and the Bank of England and the financial market turmoil," Occasional Paper Series 107, European Central Bank.
    6. Patrick McGuire & Goetz von Peter, 2009. "The US dollar shortage in global banking," BIS Quarterly Review, Bank for International Settlements, March.
    7. Philippine Cour-Thimann & Bernhard Winkler, 2012. "The ECB’s non-standard monetary policy measures: the role of institutional factors and financial structure," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 28(4), pages 765-803, WINTER.
    8. Mr. Peter Stella, 1997. "Do Central Banks Need Capital?," IMF Working Papers 1997/083, International Monetary Fund.
    9. Richhild Moessner & William A Allen, 2010. "Options for meeting the demand for international liquidity during financial crises," BIS Quarterly Review, Bank for International Settlements, September.
    10. Claudio Borio & William Nelson, 2008. "Monetary operations and the financial turmoil," BIS Quarterly Review, Bank for International Settlements, March.
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    Cited by:

    1. Donato Masciandaro & Davide Romelli, 2017. "Twin Peaks And Central Banks: Economics, Political Economy And Comparative Analysis," BAFFI CAREFIN Working Papers 1768, BAFFI CAREFIN, Centre for Applied Research on International Markets Banking Finance and Regulation, Universita' Bocconi, Milano, Italy.
    2. Mark Carlson & Burcu Duygan-Bump & William Nelson, 2015. "Why do we need both liquidity regulations and a lender of last resort? A perspective from Federal Reserve lending during the 2007-09 US financial crisis," BIS Working Papers 493, Bank for International Settlements.
    3. Marcin Jerzy Michalski & Michael Bowe & Olga Kolokolova, 2016. "Systemic risk, interbank market contagion, and the lender of last resort function," IFC Bulletins chapters, in: Bank for International Settlements (ed.), Combining micro and macro data for financial stability analysis, volume 41, Bank for International Settlements.
    4. Jakob Korbinian Eberl, 2016. "The Collateral Framework of the Eurosystem and Its Fiscal Implications," ifo Beiträge zur Wirtschaftsforschung, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, number 69.
    5. Bank for International Settlements, 2015. "Central bank operating frameworks and collateral markets," CGFS Papers, Bank for International Settlements, number 53, december.

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    More about this item

    Keywords

    Banking crisis; central bank liquidity; lenders of last resort;
    All these keywords.

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • N10 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - General, International, or Comparative

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