Central banks and financial stability: rediscovering the lender-of-last-resort practices in a finance economy

The purpose of our paper is to assess whether central banks have adopted new practices of lending in last resort during the 2007–09 financial crisis. We compare the current period with the classical period, both featured by a finance economy with developed financial markets and unregulated institutions. Beyond the differences determined by the monetary regime and concerning the central bank rate policy, we find similarities such as the enlargements of the set of counterparties and eligible collateral assets. Since the credit system is based on financial markets and innovations, central banks have a wider involvement that goes beyond a narrow conception of the lender of last resort that prevailed under a regulated banking system. We conclude that the historical roots of financial stabilisation by central banks in a finance economy have just been rediscovered, and that the functions of lender of last resort and market maker of last resort may be analytically integrated. Copyright , Oxford University Press.(This abstract was borrowed from another version of this item.)