Topic: Lender of last resort

1. Lessons from the Use of Extraordinary Central Bank Liquidity Facilities

   Bank of Canada Review Article: Bank of Canada Review - Spring 2011 - Stéphane Lavoie, Alex Sebastian, Virginie Traclet

   The recent crisis was characterized by widespread deterioration in funding conditions, as well as impairment of the mechanism through which liquidity is normally redistributed within the financial system. Central banks responded with extraordinary measures. This article examines the provision of liquidity by central banks during the crisis as they adapted their existing facilities and introduced new ones, while encouraging a return to private markets and mitigating moral hazard. A review of this experience illustrates the importance of clear principles for intervention, a flexible operating framework, and clear communication and co-operation by central banks. By exposing the degree of interdependence of financial institutions and markets the crisis highlighted the need for reforms aimed at improving the infrastructure supporting core funding markets and the liquidity of individual institutions.

   Topics: Financial markets; Financial stability; Lender of last resort

2. The Bank of Canada as Lender of Last Resort

   Bank of Canada Review Article: Bank of Canada Review - Winter 2004-2005 - Fred Daniel, Walter Engert, Dinah Maclean

   As the ultimate provider of Canadian-dollar liquidity to the financial system, the Bank of Canada has the unique capacity to create Canadian-dollar claims on the central bank and the power to make secured loans or advances to chartered banks and other members of the Canadian Payments Association. The Bank supplies overnight credit on a routine basis through the Standing Liquidity Facility (SLF) to direct participants in the Large Value Transfer System, and Emergency Lending Assistance (ELA) to solvent deposit-taking institutions that require more substantial and prolonged credit. The authors review the policy framework that guides the Bank's lender-of-last-resort function, including the key issues, terms and conditions, and eligibility criteria associated with its SLF and ELA activities. Also discussed are foreign currency ELA, the relationship between SLF and ELA, systemic risk and Bank of Canada intervention, and the potential provision of liquidity to major clearing and settlement systems.

   Topics: Financial stability; Lender of last resort; Payment clearing and settlement systems