Nothing Special   »   [go: up one dir, main page]
Scribd Logo
Upload

Welcome to Scribd!

  • 55 views

    Lender of Last Resort

    Uploaded by

    adeelturk
    A lender of last resort is typically a central bank, such as the Federal Reserve, that provides credit to financial institutions when no one else will to prevent bankruptcies that could destabilize the entire financial system. By acting as a backstop, the lender of last resort aims to maintain stability and avoid panic withdrawals by protecting depositors and ensuring a continuous flow of credit to the broader economy. While borrowing from the lender of last resort indicates the institution is at risk or in distress, its role is to prevent disruptions from the failure of too-big-to-fail banks and companies.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOC, PDF, TXT or read online from Scribd

    Lender of Last Resort

    Uploaded by

    adeelturk
    55 views2 pages
    A lender of last resort is typically a central bank, such as the Federal Reserve, that provides credit to financial institutions when no one else will to prevent bankruptcies that could destabilize the entire financial system. By acting as a backstop, the lender of last resort aims to maintain stability and avoid panic withdrawals by protecting depositors and ensuring a continuous flow of credit to the broader economy. While borrowing from the lender of last resort indicates the institution is at risk or in distress, its role is to prevent disruptions from the failure of too-big-to-fail banks and companies.

    Original Description:

    Copyright

    © Attribution Non-Commercial (BY-NC)

    Available Formats

    DOC, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    A lender of last resort is typically a central bank, such as the Federal Reserve, that provides credit to financial institutions when no one else will to prevent bankruptcies that could destabilize the entire financial system. By acting as a backstop, the lender of last resort aims to maintain stability and avoid panic withdrawals by protecting depositors and ensuring a continuous flow of credit to the broader economy. While borrowing from the lender of last resort indicates the institution is at risk or in distress, its role is to prevent disruptions from the failure of too-big-to-fail banks and companies.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    55 views2 pages

    Lender of Last Resort

    Uploaded by

    adeelturk
    A lender of last resort is typically a central bank, such as the Federal Reserve, that provides credit to financial institutions when no one else will to prevent bankruptcies that could destabilize the entire financial system. By acting as a backstop, the lender of last resort aims to maintain stability and avoid panic withdrawals by protecting depositors and ensuring a continuous flow of credit to the broader economy. While borrowing from the lender of last resort indicates the institution is at risk or in distress, its role is to prevent disruptions from the failure of too-big-to-fail banks and companies.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    of 2

    LENDER OF LAST RESORT

    A lender of last resort is an institution willing to extend credit when no one else will.
    Originally the term referred to a reserve financial institution, most often the central bank
    of a country, that secured well-connected banks and other institutions that are too-big-to-
    fail against bankruptcy.

    Purpose
    Due to fractional reserve banking, in aggregate, all lenders and borrowers are insolvent.
    A lender of last resort serves as a stopgap to protect depositors, prevent widespread panic
    withdrawal, and otherwise avoid disruption in productive credit to the entire economy
    caused by the collapse of one or a handful of institutions. Borrowing from the lender of
    last resort by commercial banks is usually not done except in times of crisis. This is
    because borrowing from the lender of last resort indicates that the institution in question
    has taken on too much risk, or that the institution is experiencing financial difficulties
    (since it is often only possible when the borrower is near collapse).

    In the United States the Federal Reserve serves as the lender of last resort to those
    institutions that cannot obtain credit elsewhere and the collapse of which would have
    serious implications for the economy. It took over this role from the private sector
    "clearing houses" which operated during the Free Banking Era; whether public or private,
    the availability of liquidity was intended to prevent bank runs.

    Within other major world economies this role is undertaken by the Bank of England in
    the United Kingdom (the central bank of the UK), in the Eurozone by the European
    Central Bank, in Switzerland by the Swiss National Bank, in Japan by the Bank of Japan
    and in Russia by the Central Bank of Russia.

    JPMorgan Chase and HSBC are examples of non-central banks that have acted as a
    lender of last resort on several occasions.[1] John Pierpont Morgan is considered to have
    played the role of a lender of last resort during the Panic of 1907.

    BAILOUT

    A bailout is an act of giving capital to an entity (a company, a country, or an individual)


    that is in danger of failing, in an attempt to save it from bankruptcy, insolvency, or total
    liquidation and ruin; or to allow a failing entity to fail gracefully without spreading
    contagion.[1]

    A bailout could be done for mere profit, as when a predatory investor resurrects a
    floundering company by buying its shares at fire-sale prices; for social improvement, as
    when, hypothetically speaking, a wealthy philanthropist reinvents an unprofitable fast
    food company into a non-profit food distribution network; or the bailout of a company
    might be seen as a necessity in order to prevent greater, socioeconomic failures: For
    example, the US government assumes transportation to be the backbone of America's
    general economic fluency, which maintains the nation's geopolitical power.[2] As such, it
    is the policy of the US government to protect the biggest American companies
    responsible for transportation—airliners, petrol companies, etc—from failure through
    subsidies and low-interest loans. These companies, among others, are deemed "too big to
    fail" because their goods and services are considered by the government to be constant
    universal necessities in maintaining the nation's welfare and often, indirectly, its security.
    [3][4]

    Emergency-type government bailouts can be controversial. Debates raged in 2008 over if


    and how to bailout the failing auto industry in the United States. Those against it, like
    pro-free market radio personality Hugh Hewitt, saw this bailout as an unacceptable
    passing-of-the-buck to taxpayers. He denounced any bailout for the Big Three, arguing
    that mismanagement caused the companies to fail, and they now deserve to be dismantled
    organically by the free-market forces so that entrepreneurs may arise from the ashes; that
    the bailout signals lower business standards for giant companies by incentivizing risk,
    creating moral hazard through the assurance of safety nets (that others will pay for) that
    ought not be, but unfortunately are, considered in business equations; and that a bailout
    promotes centralized bureaucracy by allowing government powers to choose the terms of
    the bailout. Others, such as economist Jeffrey Sachs[5] have characterized this particular
    bailout as a necessary evil and have argued that the probable incompetence in
    management of the car companies is insufficient reason to let them fail completely and
    risk disturbing the (current) delicate economic state of the United States, since up to three
    million jobs rest on the solvency of the Big Three and things are bleak enough as it is. In
    any case, the bones of contention here can be generalized to represent the issues at large,
    namely the virtues of private enterprise versus those of central planning, and the dangers
    of a free market's volatility versus the those of socialist bureaucracy.

    Furthermore, government bailouts are criticized as corporate welfare which encourages


    corporate irresponsibility.

    Governments around the world have bailed out their nations' businesses with some
    frequency since the early 20th century. In general, the needs of the entity/entities bailed
    out are subordinate to the needs of the state.

    You might also like