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A History of Last-resort Lending and Other Support for Troubled Financial Institutions in Australia

  • Bryan Fitz-Gibbon

    (Reserve Bank of Australia)

  • Marianne Gizycki

    (Reserve Bank of Australia)

Registered author(s):

    This paper surveys the history of last-resort lending and other support provided to financial institutions in Australia and compares the practical implementation of lender-of-last-resort policy with policy prescriptions derived from the theoretical literature. Last-resort support serves to counter the market failures that can see fundamentally sound financial institutions fail due to a lack of liquidity, and to protect the economy from the systemic costs of such failures. The provision of lender-of-last-resort support, however, creates moral hazard costs. During the nineteenth century, Australian colonial governments and banking industry groups provided support to troubled financial institutions in a variety of ways that reflected both the resources they could draw on and their ability to constrain moral hazard behaviour. Since 1900, Australia’s experience has been unusual by international standards: the central bank has rarely acted as a lender of last resort; and, despite this, virtually no Australian bank depositor has lost money. Direct loans were provided only twice: once as a last-resort loan and once to ease the exit of a failed bank. Instead, support has come in more indirect forms. Loans were provided to three banks in support of their efforts to provide funds to illiquid building societies. Most instances of disruptions to financial institutions’ access to liquidity, however, have been successfully staunched by the central bank’s issuance of reassuring public statements.

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    Paper provided by Reserve Bank of Australia in its series RBA Research Discussion Papers with number rdp2001-07.

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    Date of creation: Oct 2001
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    Handle: RePEc:rba:rbardp:rdp2001-07
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    1. Chay Fisher & Christopher Kent, 1999. "Two Depressions, One Banking Collapse," RBA Research Discussion Papers rdp1999-06, Reserve Bank of Australia.
    2. Rochet, Jean-Charles & Tirole, Jean, 1996. "Interbank Lending and Systemic Risk," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(4), pages 733-62, November.
    3. Fama, Eugene F., 1985. "What's different about banks?," Journal of Monetary Economics, Elsevier, vol. 15(1), pages 29-39, January.
    4. D.T. Merrett, 1991. "FINANCIAL INSTITUTIONS UNDER PRESSURE: ARE THE RIGHT LESSONS BEING LEARNT FROM THE 1890s?," Economic Papers, The Economic Society of Australia, vol. 10(1), pages 1-10, 03.
    5. S. Mishkin, Frederic, 1999. "Financial consolidation: Dangers and opportunities," Journal of Banking & Finance, Elsevier, vol. 23(2-4), pages 675-691, February.
    6. Dowd, Kevin, 1992. " Models of Banking Instability: A Partial Review of the Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 6(2), pages 107-32.
    7. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June.
    8. Moore, Gregory, 1999. " Solutions to the Moral Hazard Problem Arising from the Lender-of-Last-Resort Facility," Journal of Economic Surveys, Wiley Blackwell, vol. 13(4), pages 443-76, September.
    9. Selgin, George A. & White, Lawrence H., 1985. "The Evolution of a Free Banking System," Working Papers 85-38, C.V. Starr Center for Applied Economics, New York University.
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