Re-thinking the lender of last resort

The lender of last resort (LOLR) is perhaps the most controversial role of a central bank. On the one hand, providing emergency liquidity assistance to financial institutions is a core central bank responsibility, given its unique ability to create liquid assets in the form of central bank reserves, its central position within the payment system, and its macroeconomic stabilisation objective. On the other hand, acting as LOLR is seen as very risky, potentially creating moral hazard on a massive scale, exposing the central bank to large financial risks, and blurring the boundary with fiscal policy. Moreover, liquidity assistance to individual institutions is typically deeply unpopular, creating reputation risks. The financial crisis has served as reminder of the critical importance of the LOLR in restoring financial stability. But it has also raised fundamental questions about the design of LOLR frameworks and the execution of LOLR policies. How to strike the right balance between limiting risks for central banks and ensuring that the LOLR function can be performed effectively when needed? Should central banks be ambiguous in public about the terms and conditions of liquidity support? Or is there a case for well-articulated LOLR policies communicated ex ante as part of a broader financial stability framework? The aim of the BIS workshop was to explore issues related to the future design of LOLR policies, including governance, operational arrangements, and international aspect. The discussions in this volume do not, of course, converge on simple answers. They do, however, underscore the importance of careful consideration of the articulation of the LOLR function going forward.