Central Banks, Systemic Lending, and Collateral Markets
This chapter examines the evolving role that central banks play in funding private banks and, increasingly, a wider range of nonbank financial intermediaries. During periods of financial stability, the central bank may provide last resort funding to an individual bank suffering a temporary liquidity shortage due to factors specific to that bank. During a financial crisis in which it is not individual banks but, rather, a sector of the funding market that becomes illiquid, the central bank will also engage in systemic lending to help stabilize an entire sector of the financial market. Traditionally, access to the central bank’s last resort liquidity was available only to depository banks with a preexisting relationship to the central bank and with collateral that met strict guidelines. This chapter analyzes how the traditional approach to central bank funding has changed. The first part of this chapter situates last resort lending by the central bank in the context of the recent emergence of the interbank funding channel, a liquidity clearinghouse more inclusive of collateral and counterparties than the traditional money market. The second part focuses on how central banks changed their traditional approach to providing last resort lending after the 2007 liquidity break. Previous approaches had emphasized efforts to ensure that solvent banks remained liquid. This time, though, central banks served a wider range of financial intermediaries and became willing to accept as collateral a wider range of private assets, including structured finance instruments.
Edward Elgar Publishing
Bank management, Banking law, Crisis management
Banking and Finance Law | Law
José M. Gabilondo, Central Banks, Systemic Lending, and Collateral Markets, in RESEARCH HANDBOOK ON CRISIS MANAGEMENT IN THE BANKING SECTOR 24, 41 (Matthias Haentjens and Bob Wessels eds., 2015).