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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.
| | == Summary == |
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| The primary purpose of the activity by the central bank is stability of the financial system.
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| Secondarily, the purpose is stability of the particular institution affected.
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| Central banks generally avoid risk taking behaviour.
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| Accordingly, in principle, the central banks only lend against good security ([[collateral]]) and with a conservative [[haircut]].
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| In practice, liquidity shortage may force a bank to seek to dispose of assets, even at significant losses that erode its capital.
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| 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]].
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| Lender of last resort activity is more recently often referred to as emergency liquidity assistance.
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| The European Central Banks' scheme is called Emergency Liquidity Assistance (ELA), for example.
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| == See also == | |
| * [[Central bank]]
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Latest revision as of 09:29, 27 July 2023
Summary
Importing files from local file repository
