Lender of last resort

A central bank’s role of providing emergency liquidity to solvent financial institutions when ordinary funding markets fail. It aims to contain runs and prevent liquidity shortages from spreading through the financial system.

Walter Bagehot: A nineteenth-century British journalist and economist who set out influential principles for central-bank crisis lending. His advice to lend freely at a high rate against good collateral became a classic guide to emergency lending.
Bank Charter Act 1844: A British law that restricted the Bank of England’s note issuance and shaped nineteenth-century monetary debates. Its constraints became conspicuous during crises when the Bank faced pressure to expand liquidity.
Federal Reserve emergency lending: Lending by the Federal Reserve to support financial institutions or markets during periods of stress. Its crisis facilities show how the role can extend beyond routine loans to banks.
Deposit insurance: A system that protects eligible bank deposits up to specified limits, usually through a public or industry-backed guarantee. It protects depositors directly, while emergency lending supplies funds to institutions.
Discount window: A central-bank facility through which eligible financial institutions borrow against collateral. It is a standard channel for central banks to supply liquidity directly to banks.
Panic of 1866: A financial crisis triggered by the collapse of the British firm Overend, Gurney and Company. The Bank of England’s response helped shape later arguments about emergency lending.
Bank of England liquidity facilities: Bank of England operations that provide liquidity to eligible financial institutions against collateral. These facilities are a contemporary form of the central bank’s emergency lending role.
Bailout: Public or private financial support intended to prevent an entity from failing or to limit the costs of its failure. A bailout may absorb losses or provide capital; lender-of-last-resort lending is chiefly a liquidity operation.
Collateral (finance): An asset pledged to secure a loan and subject to seizure if the borrower defaults. Collateral helps limit losses when a central bank lends during a crisis.
Lombard Street (book): Walter Bagehot’s 1873 book analyzing the London money market and the Bank of England’s crisis role. It gave the lender-of-last-resort doctrine its most influential early formulation.

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