Banking · Core
Lender of Last Resort
The lender of last resort is the central bank standing ready to fund solvent-but-illiquid banks against collateral — Bagehot’s rule, with politics.
Definition
Lend freely, at a penalty rate, against good collateral, to solvent names (Bagehot). In practice, stigma, collateral haircuts, and ‘who is solvent’ are the fight. Facilities (DW, PDCF, BTFP) are the modern forms.
Why it matters
It is how a liquidity shock is not allowed to become a fire sale — when the facility is used. Stigma can make the rule fail.
Case
2008 and 2023: discount-window stigma vs emergency facilities with friendlier optics. The function was LOLR; the name was the product design.
How to read it
Collateral, haircut, term, and stigma. A facility nobody will use is not a lender of last resort.
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