Lender of last resort and Notional pooling: Difference between pages

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A concession given to a select number of financial institutions whereby their central bank agrees to provide them with funds if they should get into [[liquidity]] difficulties.
''Banking''.


The primary purpose of the activity by the central bank is stability of the financial system as a whole.  
The technique used by banks for calculating interest on balances in a notional cash pool.  


Secondarily, the purpose is stability of the particular institution affected.
Excess funds in the accounts of a company or its subsidiaries are used to offset deficits in other company accounts for the purpose of determining interest earned or owed.  


Notional pooling is also referred to as interest offset pooling.


Central banks generally avoid risk taking behaviour.
Accordingly, in principle, the central banks only lend against good security ([[collateral]]) and with a conservative [[haircut]].
In practice, liquidity shortage may force a bank to seek to dispose of assets, even at significant losses that erode its capital.
Eventually the central bank may lend against less-good collateral and with less than its desired haircut on collateral valuation - until it won't, when the game is over and the story becomes one of [[resolution]].
Lender of last resort activity is also often referred to as emergency liquidity assistance.
The European Central Bank's scheme is called Emergency Liquidity Assistance (ELA), for example.


== See also ==
* [[Cash pool]]
* [[CertICM]]
* [[Cross-guarantees]]
* [[Interest rate enhancement]]


== See also ==
[[Category:Long_term_funding]]
* [[Central bank]]
[[Category:Cash_management]]
* [[Emergency liquidity assistance]]
* [[Financial stability]]

Revision as of 08:14, 29 November 2014

Banking.

The technique used by banks for calculating interest on balances in a notional cash pool.

Excess funds in the accounts of a company or its subsidiaries are used to offset deficits in other company accounts for the purpose of determining interest earned or owed.

Notional pooling is also referred to as interest offset pooling.


See also

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