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Revisiting the central bank's lender of last resort function

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  • Joost Bats
  • Jan Willem van den End
  • John Thoolen

Abstract

During the global financial crisis which started in 2007 (henceforth: crisis), central banks provided extended liquidity support, both to individual institutions and financial markets more broadly. These measures were taken as part of the lender of last resort (LOLR) function of the central bank, which can be activated in response to various kinds of liquidity risk. In times of systemic liquidity stress, when markets do not function properly and liquidity buffers fall short, a larger intermediary role of the central bank is warranted. Extended liquidity supply by the central bank can then underpin the intermediary function of the financial system to ensure the continuation of critical economic processes. In a systemic crisis, supporting financial stability is tantamount to safeguarding the monetary transmission process and thus, ultimately, also ensuring price stability.

Suggested Citation

  • Joost Bats & Jan Willem van den End & John Thoolen, 2018. "Revisiting the central bank's lender of last resort function," DNB Occasional Studies 1604, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:dnbocs:1604
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    References listed on IDEAS

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    1. Christophe Cahn & Julien Matheron & Jean‐Guillaume Sahuc, 2017. "Assessing the Macroeconomic Effects of LTROs during the Great Recession," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 49(7), pages 1443-1482, October.
    2. Stark, Oded & Taylor, J Edward & Yitzhaki, Shlomo, 1986. "Remittances and Inequality," Economic Journal, Royal Economic Society, vol. 96(383), pages 722-740, September.
    3. Paul Tucker, 2014. "The lender of last resort and modern central banking: principles and reconstruction," BIS Papers chapters,in: Bank for International Settlements (ed.), Re-thinking the lender of last resort, volume 79, pages 10-42 Bank for International Settlements.
    4. Stephen G. Cecchetti & Piti Disyatat, 2010. "Central bank tools and liquidity shortages," Economic Policy Review, Federal Reserve Bank of New York, issue Aug, pages 29-42.
    5. Darracq-Paries, Matthieu & De Santis, Roberto A., 2015. "A non-standard monetary policy shock: The ECB's 3-year LTROs and the shift in credit supply," Journal of International Money and Finance, Elsevier, vol. 54(C), pages 1-34.
    6. Charles Goodhart, 1999. "Myths About the Lender of Last Resort," FMG Special Papers sp120, Financial Markets Group.
    7. Marc C Dobler & Simon T Gray & Diarmuid Murphy & Bozena Radzewicz-Bak, 2016. "The Lender of Last Resort Function after the Global Financial Crisis," IMF Working Papers 16/10, International Monetary Fund.
    8. Bindseil, Ulrich, 2014. "Monetary Policy Operations and the Financial System," OUP Catalogue, Oxford University Press, number 9780198716907.
    9. Eisenschmidt, Jens & Hirsch, Astrid & Linzert, Tobias, 2009. "Bidding behaviour in the ECB's main refinancing operations during the financial crisis," Working Paper Series 1052, European Central Bank.
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    Cited by:

    1. Joost Bats & Tom Hudepohl, 2019. "Impact of targeted credit easing by the ECB: Bank-level evidence," DNB Working Papers 631, Netherlands Central Bank, Research Department.

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