Briefly analyse the Lender of Last Resort facility.

The idea of LOLR was introduced by Walter Bagehot in 1873 . He developed a system where the central patois would provide a impermanent liquidity injection into a single bank or the banking system at a time of crisis. Bagehots idea was that a short- landmark temporary loan should be habituated to illiquid banks and ones which be bankrupt should be allowed to fail. The effect universe that this would help to annul systemic risk of infection and the collapse of the banking system . There atomic number 18 four main criticisms of this protection project as for the first time LOLR could in some aspects be seen as illegal downstairs EC law . though if LOLR is supplied under strict conditions thence it is highly unlikely that it could be considered illegal under the pact . The second concern is that it impart increase the chances of moral hazard. Thirdly, large-mindedger banks will stand a bring forbidden chance of receiving monetary aid due to the doctrine of being too bi g to fail. As Lastra points out a larger bank in crisis would undoubtedly create a larger risk to the financial system. Size should nevertheless be relevant if it is intertwined with earthshaking inter-bank transactions which will affect other(a) institutions. The fourth agentive role is that it can lead to distortion of disceptation between banks in the same market place. LOLR assistance should only be given to banks that are illiquid and not those that are insolvent . The decision frequently has to be made quickly and the entropy necessary to answer whether a bank is illiquid or insolvent may be unavailable. The Memorandum of Understanding has as merely not been tried and true and so it is uncertain how potent it will be.

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