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

Author

Listed:
  • Bryan Fitz-Gibbon

    (Reserve Bank of Australia)

  • Marianne Gizycki

    (Reserve Bank of Australia)

Abstract

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.

Suggested Citation

  • Bryan Fitz-Gibbon & Marianne Gizycki, 2001. "A History of Last-resort Lending and Other Support for Troubled Financial Institutions in Australia," RBA Research Discussion Papers rdp2001-07, Reserve Bank of Australia.
  • Handle: RePEc:rba:rbardp:rdp2001-07
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    References listed on IDEAS

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    4. 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 443-476, September.
    5. Rochet, Jean-Charles & Tirole, Jean, 1996. "Interbank Lending and Systemic Risk," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 28(4), pages 733-762, November.
    6. Chay Fisher & Christopher Kent, 1999. "Two Depressions, One Banking Collapse," RBA Research Discussion Papers rdp1999-06, Reserve Bank of Australia.
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    Citations

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    Cited by:

    1. Jonathan Kearns & Philip Lowe, 2008. "Promoting Liquidity: Why and How?," RBA Annual Conference Volume,in: Paul Bloxham & Christopher Kent (ed.), Lessons from the Financial Turmoil of 2007 and 2008 Reserve Bank of Australia.
    2. Brown, Rayna, 2006. "Mismanagement or mismeasurement? Pitfalls and protocols for DEA studies in the financial services sector," European Journal of Operational Research, Elsevier, vol. 174(2), pages 1100-1116, October.
    3. David Rodgers, 2015. "Credit Losses at Australian Banks: 1980–2013," RBA Research Discussion Papers rdp2015-06, Reserve Bank of Australia.

    More about this item

    Keywords

    Australia; banking history; lender of last resort;

    JEL classification:

    • N27 - Economic History - - Financial Markets and Institutions - - - Africa; Oceania
    • N47 - Economic History - - Government, War, Law, International Relations, and Regulation - - - Africa; Oceania

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