Lender of last resort and File:120px-Figure3 Rating actions by sector.jpg: 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.
== Summary ==
 
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The primary purpose of the activity by the central bank is stability of the financial system as a whole.
 
Secondarily, the purpose is stability of the particular institution affected.
 
 
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 ==
* [[Central bank]]
* [[Emergency liquidity assistance]]

Latest revision as of 09:29, 27 July 2023

Summary

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