Central Banks Should Be Reluctant to Act as a Lender of Last Resort
Topic 2: Discuss the extent to which a National Central Bank should be reluctant to act as a lender of last resort.
Abstract This study provides an overview of central bank’ “lender of last resort” (LOLR) function. “Lender of last resort” has a very important role in helping the central bank’s monetary policy operating through changes in rediscount rate and refinance rate. The main purpose of LOLR for all the central banks is to ensure the stability and safety of the commercial banking system. In this paper, I will define central bank and its function. Next, I will evaluate why central banks should be reluctant to act as a lender of last resort.
I. Introduction
Central bank is a public institution that manages a state’s currency, money supply, and interest rates. Central banks have a wide range of responsibilities, from overseeing monetary policy to implementing specific goals such as currency stability, low inflation and full employment. Central banks also generally issue currency, function as the bank of the government, regulate the credit system, oversee commercial banks, manage exchange reserves and act as a lender of last resort. However, the role of Central Bank and the scope of its participation may change due to the effect of different laws and the presence of various stakeholders. Thus, US Central Bank does not act as a regulatory body of the financial sector (Driffill et al., 2005), while the intervention activity of Japan Central Bank demand the approval of other governmental bodies (Fujiwara, 2005). The role of central banks becomes more important in the financial crisis that originated in the United States in summer 2007. Its breadth and potency rapidly increased, spilled over into the global financial system after the collapse of Lehman Brothers in the autumn of 2008. According to Hiroshi Nakaso, the crisis again reminded us of the inherent instability of the financial system and the vicious compounding of problems between the
Abstract This study provides an overview of central bank’ “lender of last resort” (LOLR) function. “Lender of last resort” has a very important role in helping the central bank’s monetary policy operating through changes in rediscount rate and refinance rate. The main purpose of LOLR for all the central banks is to ensure the stability and safety of the commercial banking system. In this paper, I will define central bank and its function. Next, I will evaluate why central banks should be reluctant to act as a lender of last resort.
I. Introduction
Central bank is a public institution that manages a state’s currency, money supply, and interest rates. Central banks have a wide range of responsibilities, from overseeing monetary policy to implementing specific goals such as currency stability, low inflation and full employment. Central banks also generally issue currency, function as the bank of the government, regulate the credit system, oversee commercial banks, manage exchange reserves and act as a lender of last resort. However, the role of Central Bank and the scope of its participation may change due to the effect of different laws and the presence of various stakeholders. Thus, US Central Bank does not act as a regulatory body of the financial sector (Driffill et al., 2005), while the intervention activity of Japan Central Bank demand the approval of other governmental bodies (Fujiwara, 2005). The role of central banks becomes more important in the financial crisis that originated in the United States in summer 2007. Its breadth and potency rapidly increased, spilled over into the global financial system after the collapse of Lehman Brothers in the autumn of 2008. According to Hiroshi Nakaso, the crisis again reminded us of the inherent instability of the financial system and the vicious compounding of problems between the
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