lender of last resort

Lender of Last Resort

lender of last resort

Banks are financial institutions that have been lending funds to individuals and corporate bodies down the years.

On occasions when an individual needs funds/face a liquidity crunch, he may approach a bank to solve his problem. The bank then checks his creditworthiness and issues him funds as per terms that are mutually agreeable.

However, what happens if a bank faces a similar crisis? This is precisely where the lender of last resort (LOLR) steps in.

Lender of Last Resort – Meaning

The LOLR of a country is the Central or Prime Bank of that country which acts as a “Bank for the banks” of that country. It provides credit or it extends liquidity to financial institutions that are facing financial distress.

Typically these institutions have no other means of credit. And their inability to obtain funds is ly to have severe ramifications on the country’s economy as a whole.

Situation in India

In India, the Central Bank is the Reserve Bank of India (RBI). One should not get confused with the Central Bank of India (a much smaller institution that is into retail banking). The RBI was established on April 01, 1935, under the Reserve Bank of India Act. It is headed by the Governor and has a Board of Directors, which ensures its smooth running.

Central Banks in Other Countries

Down the years the Central Banks of other countries have had to bail out financial institutions when risky practices have caused them to suffer a severe credit crunch.

The table below presents the Central Banks of some prominent countries:

CountryName of the Central Bank
USAFederal Reserve
UKBank of England
GermanyBundesbank
JapanBank of Japan

The Federal Reserve had to step in on the occasion of the financial institution called Lehmann Brothers going bust as a consequence of dubious financial practices that were very harmful to its net worth. Bear Stearns too was a firm that necessitated the Federal Reserve to use its bailout powers, so that the economy of the US as a whole, did not suffer.

The International Monetary Fund (IMF), headquartered in Washington D.C. acts as the LOLR for nations whose economy is in a shambles. In the recent past, Greece and Iraq have sought funds from this body, so as to tide over financial emergencies that have plagued their economies.

Closer home, the RBI had to decide on the course of action to adopt when Global Trust Bank suffered severe losses that endangered the funds of its account holders.

Benefits of a Lender of Last Resort

  • Due to the LOLR, the funds of individuals in banks that are on the brink of closing get protection. These account holders are thus protected and do not run the risk of suffering financial loss.
  • Secondly, the policies and assurances of the LOLR will in all lihood prevent individuals from withdrawing their money in a panic. Banks do not keep all their funds in a liquid form and are in no position to service their account holders if all wish to withdraw their funds at the same time.

Drawbacks of a Lender of Last Resort

The major negative seen in the Central bank being the safety net to financial institutions is that sometimes banks are perceived to take the role of the Central bank for granted.

This causes them to not pay heed to the checks and balances that have to be maintained when lending funds or procuring funds, which exposes them to grave financial risk. The rates of interest at which LOLRs extend credit may be relatively high.

This may be because of the high-risk profile of its debtors.

Conclusion

Lenders of Last Resort certainly have a very salient role to play in today’s dynamic financial markets.

Globalization has widened horizons and has extended markets in ways that funds are utilized (or sometimes misused), which certainly calls for a watchdog body that can step in to douse the flames when a bank or corporate body is in dire straits.

It has to perform its duties judiciously so that its presence may retain a much-needed relevance. At the same time entities should be able to benefit from its source of funds. This is very often the only lifeline that safeguards the cash-strapped body and perhaps the country’s economy in general.

Last updated on : January 12th, 2019

Источник: https://efinancemanagement.com/sources-of-finance/lender-of-last-resort

Перевод — lender of last resort — с английского — на русский

lender of last resort

  • 1 lender of last resort
    1. кредитор последней инстанции

    ; кредитор последней инстанции Центральный банк страны, отвечающий за контроль над всей ее банковской системой. В Великобритании эти функции выполняет Банк Англии, ссужающий учетные дома (discount houses) путем скупки казначейских векселей (Treasury bills), предоставления ссуд в других бумажных активах или выдачи прямых займов и устанавливающий базовую процентную ставку (base rate). Коммерческие банки (Commercial banks) к Банку Англии непосредственно не обращаются, а занимают деньги у учетных домов.[ http://www.vocable.ru/dictionary/533/symbol/97] кредитор последней инстанции Центральный банк страны, одной из обязанностей которого является, в периоды экономических кризисов (особенно в условиях банковской паники), поддержка банковской системы путем выдачи кредитов, покупки активов и др. подобных мер.[ http://slovar-lopatnikov.ru/]

EN

Англо-русский словарь нормативно-технической терминологии > lender of last resort

  • 2 lender of last resort

    . LOLR, LLR

    1) эк. кредитор последней инстанции )

    See:

    central bank

    2) кредитор последней инстанции, последний кредитор в критической ситуации

    а) эк. )

    A leading country must act as a lender of last resort if global financial stability is to be ensured. — Сильная страна должна выступать в качестве кредитора последней инстанции для достижения стабильности мировой финансовой системы.

    See:

    International Monetary Fund, Kindleberger, Charles Poor

    б) эк. )

    * * *

    кредитор последней инстанции:1) функции центрального банка по поддержанию ликвидности и стабильности банковской системы, предотвращению финансовой паники: центральный банк обязуется учитывать векселя или предоставлять кредит коммерческим банкам по официальной учетной ставке;2) функция предотвращения международного финансового кризиса путем предоставления кредитов национальным органам власти; эту функцию традиционно выполняет либо самое сильное государство, либо (в последние годы) Международный валютный фонд;3) государственная кредитная программа для частного сектора (обычно малого бизнеса), условием доступа к которой является невозможность получения кредита из других источников.

    * * *

    • последний кредитор в критической ситуации

    • центральный банк

    Англо-русский экономический словарь > lender of last resort

  • 3 lender of last resort

    Большой англо-русский и русско-английский словарь > lender of last resort

  • 4 lender of last resort

    Универсальный англо-русский словарь > lender of last resort

  • 5 lender of last resort

    фр. prêteur en dernier ressort; prêteur de dernier recours

    исп. prestamista en última instancia

    кредитор последней инстанции

    Одна из функций и основных причин существования центрального банка, заключающаяся в обеспечении наличия ликвидных средств для всей банковской системы в случае, когда существующие в рамках системы ликвидные активы оказываются под угрозой истощения

    .

    Англо-русский словарь Финансы и долги > lender of last resort

  • 6 lender of last resort

    1) последний кредитор в критической ситуации

    2) центральный банк

    Англо-русский словарь по экономике и финансам > lender of last resort

  • 7 LENDER OF LAST RESORT

    Кредитор последней инстанции
    Центральный банк страны, который берет на себя роль «банка банков».

    ЦБ осуществляет кредитование коммерческих банков и учетных домов, если они испытывают дефицит ликвидности в периоды финансовых кризисов.

    Таким образом, ЦБ обеспечивает стабильность всей банковской системы, способствуя сохранению доверия к ней общества. См. Front door, Back door.

    Новый англо-русский словарь-справочник. Экономика. > LENDER OF LAST RESORT

  • 8 LENDER OF LAST RESORT

    (кредитор последней инстанции) Центральный банк страны, отвечающий за контроль над всей ее банковской системой. В Великобритании эти функции выполняет Банк Англии, ссужающий учетные дома (discount houses) путем скупки казначейских векселей (Treasury bills), предоставления ссуд в других бумажных активах или выдачи прямых займов и устанавливающий базовую процентную ставку (base rate). Коммерческие банки (Commercial banks) к Банку Англии непосредственно не обращаются, а занимают деньги у учетных домов.

    Финансы: англо-русский толковый словарь > LENDER OF LAST RESORT

  • 9 lender of last resort

    кредитор проследней инстанции

    English-russian dctionary of contemporary Economics > lender of last resort

  • 10 lender of last resort

    кредитор последней инстанции

    English-russian dctionary of diplomacy > lender of last resort

  • 11 lender of last resort

    фин кредито́р после́дней инста́нции )

    The Americanisms. English-Russian dictionary. > lender of last resort

  • 12 lender

    кредито́р м

    lender of last resort

    The Americanisms. English-Russian dictionary. > lender

  • Источник: https://translate.academic2.ru/lender%20of%20last%20resort/en/ru/

    What is the lender of last resort? Definition and examples

    lender of last resort

    The lender of last resort in each country is its central bank.

    When a bank is in trouble and needs money, and nobody will lend to it, the central bank may intervene and lend, frequently with conditions and strings attached.

    Sometimes, the central bank will close down the troubled bank, find it a new owner, or take control of it. A lender of last resort is there to prevent a country’s financial system from collapsing.

    The role of the central bank as lender of last resort makes the creation of credit easier by boosting confidence in the banking system and reducing the risk of a bank run. A bank run is when customers panic and crowds start withdrawing their money.

    The central bank’s presence reassures customers, specifically depositors, that their money is safe. The International Monetary Fund (IMF) sometimes acts as a lender of last resort, as long as the country in need adopts an economic austerity policy – called IMF’s Austerity Conditionalities.

    According to centralbanksguide.com, a lender of last resort is:

    “An institution which is willing to offer loans as a last resort.
    Such institution is usually a country’s central bank. In this case, we talk of a wholesale lender of last resort.”

    “A central bank offers extension of credit to financial institutions experiencing financial difficulties which are unable to obtain necessary funds elsewhere.”

    This definition comes from the OECD (Organisation for Economic Co-operation and Development): “A lender of last resort is a lender, typically a central bank, which provides financial institutions with funds when they cannot borrow from the market. The availability of such lending is intended to prevent systemic problems due to liquidity shortage in individual institutions.”

    Lender of last resort – critics

    Central banks have the backing of their governments to make such loans for maintaining public confidence in the financial system.

    Critics say that having a lender of last resort may encourage banks to become reckless, because they know that if things go seriously wrong they will be bailed out.

    Such claims were validated when large financial institutions were saved following the global financial crisis of 2007/8.

    The central bank is the lender of last resort in most countries today.

    However, proponents argue that the potentially catastrophic consequences of letting everything collapse – having no lender of last resort – is incomparably more dangerous than the reckless behaviors by some banks.

    Commercial banks do not resorting to their central bank for support, and only do so in times of desperate emergencies, because such actions tell everybody that they are in trouble.

    The lender of last resort may grant loans not only to banks, but also to any other eligible financial institution, including private firms.

    Even the US Federal Reserve acknowledges the ambiguity of the central bank’s role as lender of last resort. In a report in 2014, it wrote:

    “The role of lender of last resort is probably the most ambiguous function of a central bank. On the one hand, it is typically regarded as a core responsibility of central banks, given their unique ability to create liquid assets in the form of central bank reserves, their central position within the payment system and their macroeconomic stabilization objective.”

    “On the other hand, if the availability of central bank liquidity were certain, individual banks would have reduced incentives to maintain sufficient stocks of liquid assets to cover their liquidity needs.”

    “Hence, to limit moral hazard, central banks have in many cases left open how they would respond to liquidity shortages at the level of individual institutions or the market as a whole.”

    Central banks have performed the function of lender of last resort several times over the past century.

    Lender of last resort – Bank runs

    A bank run, or a run on the bank, occurs when a large number of customers withdraw their money from deposit accounts at the same time because they think the financial institution is or may soon become insolvent.

    In a fractional-reserve banking system, banks keep only a small percentage of total deposits as cash. A run can very rapidly drain a bank’s liquidity. Customers acting on the worry that their bank may become insolvent can cause that very problem to happen when they panic – a self-fulfilling concern. Virtually every country today has a fractional-reserve banking system.

    Following the Wall Street Crash of 1929 that led to the Great Depression, there were many bank runs that caused bank failures. The US government introduced new legislation requiring banks to hold a minimum percentage of their liabilities in the form of cash reserves.

    If a bank’s reserves are not enough to deal with a bank run, a lender of last resort intervenes and injects the financial institution with emergency funds so that all customers in the run get paid.

    This function helps prevent insolvency and usually takes the wind the bank run’s sails – panicked customers eventually calm down and stop taking out their funds.

    J. P. Morgan – lender of last resort

    There have been times in history when the lender of last resort was a person. At the beginning of the 20th century, John Pierpont Morgan (1837-1913), an American financier and banker who dominated corporate finance and industrial production in the United States in the late 19th and early 20th century, assumed the role.

    During the Panic of 1907 in the United States, also known as the Knickerbocker Crisis, the New York Stock Exchange plummeted by nearly 50% from its peak the previous year

    A small bank run spread and soon hit virtually every bank across the country. Many of them went bankrupt. This mass panic might have deepened had it not been for the intervention of Mr. Morgan, who pledged huge sums from his own fortune. He managed to convince several wealthy New York bankers to do the same, to shore up the banking system.

    Video – What is a lender of last resort

    This video, published by the Federal Reserve Bank of Philadelphia, explains that a country’s lender of last resort is usually its central bank. It provides loans to financial institutions during a financial crisis to ensure the stability of that country’s financial system.

    Источник: https://marketbusinessnews.com/financial-glossary/lender-last-resort-definition-meaning/

    Lender of Last Resort — How Lenders of Last Resort Ensure Liquidity

    lender of last resort

    A lender of last resort is the provider of liquidity to financial institutions that are experiencing financial difficultiesChapter 11 BankruptcyChapter 11 is a legal process that involves reorganization of a debtor’s debts and assets. It is available to individuals, partnerships, corporations.

    In most developing and developed countries, the lender of last resort is the country’s central bank. The responsibility of the central bank is to prevent bank runs or panics from spreading to other banks due to a lack of liquidityRetained EarningsThe Retained Earnings formula represents all accumulated net income netted by all dividends paid to shareholders.

    Retained Earnings are part of equity on the balance sheet and represent the portion of the business’s profits that are not distributed as dividends to shareholders but instead are reserved for reinvestment. In the U.S.

    , the Federal Reserve Federal Reserve (The Fed)The Federal Reserve is the central bank of the United States and is the financial authority behind the world’s largest free market economy.provides liquidity to affected banks, whose lack of liquidity is ly to affect the economy.

    The last-resort lending function came into being in the late 1800s due to a series of panics that engulfed the banking industry. The panics led to the collapse of financial institutions, and this led to the loss of customers’ funds deposited in the institutions.

    The function aims to protect the depositors by providing temporary liquidity to the banks to sustain their operations.

    Although this function helped prevent the collapse of banks in the past, critics say that by providing additional liquidity, the Central Bank tempts banks to acquire more risks than necessary.

    Classical Theories

    The classical theory of lender of last resort was developed in the 19th century by Henry Thornton and Walter Bagehot. Both theorists stressed the need to protect the money stock, instead of individual banks, and allowing insolvent financial institutions to fail. They also advocated for the charging of penalty rates, good collateral, and accommodation of sound institutions only.

    When he published “An Enquiry into the Nature and Effects of the Paper Credit of Great Britain” in 1882, Henry Thornton stated that the central bank could perform the function of lender of last resort since it had the monopoly on the issuance of banknotes.

    He distinguished the Bank of England’s role as a lender of last resort since it exercised the role more strictly than any other central bank before it. Thornton also articulated the “moral hazard” problem of last-resort lending, which he said would create laxity and recklessness in lending to individual banks.

    He said that by providing relief to poorly managed banks, other banks would take excessive speculative risks without caring about the results.

    The other contributor to the classical theory was Walter Bagehot. In his 1873 book “Lombard Street,” Bagehot restated most of the points made by Thornton.

    He noted the Bank of England’s position as the holder of the ultimate reserve, making it different from the ordinary banks. However, he advocated for huge loans at a very high interest rate as the best solution to a banking crisis.

    Thornton, Bagehot argued that last resort lending should not be a continuous practice, but a temporary measure to manage banking panics.

    Preventing Bank Runs

    A bank runBank RunA bank run occurs when customers withdraw all their money simultaneously from their deposit accounts with a banking institution for fear that the bank occurs when large numbers of customers withdraw their deposits simultaneously for fear that the bank might collapse.

    It occurs during periods of financial uncertainty, and a bank run in one bank quickly spreads to other banks as customers become uncertain about the safety of their deposits. Banks only keep a portion of their customer’s deposits and give the other portion out as loans, and this makes them vulnerable to panics.

    If customers make withdrawals beyond the bank’s reserves, the bank can become insolvent.

    Cases of bank runs became prevalent during the Great Depression of the 1930s after the stock market crash. There were a series of banks runs and subsequent collapses, amidst rumors of an impending financial crisis. In a move to prevent more bank failures, the government declared a national bank holiday to allow for the inspection of banks.

    The government also enacted new regulations that required banks to hold a certain percentage of reserves. If the reserves are inadequate to stop a bank run, the central bank must lend the bank enough money to sustain customer withdrawals.

    Also, prominent cash deliveries to an affected bank can convince the depositors that the bank is not going to collapse.

    Controversy

    Although the central bank helped prevent bank runs previously, critics argue that the central bank should not act as a lender of last resort because of the following reasons:

    #1 Moral hazard

    Opponents of the function allege that commercial banks and other financial institutions are ly to make risky investments knowing that they will be bailed out if they experience financial difficulties.

    This was confirmed during the 2007/2008 financial crisis when banks invested in risky assets and were later bailed out by the Federal Reserve.

    Also, the International Financial Institution Advisory Commission accused the International Monetary Fund of bailing out banks in developing countries that were involved in risky investments.

    However, if the central bank fails to bail out banks affected by bank runs, the effects could exceed the moral hazard. The central bank can impose heavy penalties on banks that make intentional mistakes and enact regulations to guide banks borrowing from the central bank.

    #2 Private Alternatives

    Critics argue that private institutions can handle the function of lender of last resort without requiring government intervention. Before the formation of the Fed, the Suffolk Bank of Boston and the clearing-house system of New York provided banks with liquidity during bank runs.

    For example, the Suffolk Bank of Boston lessened the effects of the 1837-1839 financial panic by offering last-resort lending to member banks. The committee of the New York Clearing House Association also provided clearing-house loan certificates to banks as a way of managing the effects of the financial panic of 1857.

    Although these institutions were private-run, the critics argue that they played the role of a lender of last resort successfully without requiring the help of the government.

    #3 Tough Penalty Rates

    Imposing high penalties to banks borrowing from the central bank can force them to look for alternative sources of a bailout. The opponents claim that a strict penalty rate can make the central bank the very last lender of last resort.

    Banks would also be forced to institute internal measures to prevent a bank run for fear of paying harsh penalties for a loan that they could have maintained internally.

    For example, some banks keep an excess reserve beyond the central bank requirement during tough economic times when depositors’ withdrawals may exceed the usual limits.

    However, proponents of the lending function of the central bank observe that charging a high interest rate or penalty could make the loan too expensive to borrow, obscuring the intended purpose of the lender of last resort function.

    The proper role of central banks continues to be debated. The following CFI resources provide further information to help you understand the banking system.

    Other Resources

    • Bank of EnglandBank of EnglandThe Bank of England (BoE) is the central bank of the United Kingdom and a model on which most central banks around the world are built. Since its inception in 1694, the bank has changed from being a private bank that loaned money to the government, to being the official central bank of the United Kingdom.
    • European Central BankEuropean Central BankThe European Central Bank (ECB) is one of the seven institutions of the EU and the central bank for the entire Eurozone. It is one of the most critically important central banks in the world, supervising over 120 central and commercial banks in the member states.
    • Bank LineBank LineA bank line or a line of credit (LOC) is a kind of financing that is extended to an individual, corporation, or government entity, by a bank or other
    • Cost of DebtCost of DebtThe cost of debt is the return that a company provides to its debtholders and creditors. Cost of debt is used in WACC calculations for valuation analysis.

    Источник: https://corporatefinanceinstitute.com/resources/knowledge/finance/lender-of-last-resort/

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