Introduction
According to Buiter & Sibert (2008), ‘lender of last resort’ refers to the financial support responsibilities that central bank should take in financial crisis, which means ‘Lender of last resort’ should satisfy the market requirement for currency with high quality to prevent money stock contraction because of financial panic. Once commercial banks are temporary lack of liquidity, central bank can grant emergency loans to these bans through discounting or market purchasing on the condition that commercial banks can provide good collateral with punitive interest rates (Barros, 2000). Once ‘Lender of last resort’ pronouncing financial support for commercial banks when they are lacking in liquidity, it can help alleviating public panic on cash shortage, which can prevent possible public panic behaviour to trigger serious social problems (Bernanke & Gertler, 2000). Actually, ‘Lender of last resort’ is the institution being responsible for social capital requirement especially under the conditional of social panic or financial crisis, and this role is always played by the central bank. This essay is going to discuss the rational for the effectiveness of ‘Lender of last resort’ as a mechanism for financial crisis management. First of all, this essay is going to discuss the necessity and operation model of ‘Lender of last resort’ to show the rational. Following that, arguments on ‘Lender of last resort’ as a mechanism for financial crisis management will be discussed to show different opinions on the mechanism of ‘Lender of last resort’. Consequently, effectiveness of ‘Lender of last resort’ as a mechanism for financial crisis management in US and ethical issue of ‘Lender of last resort’ to show the effectiveness of ‘Lender of last resort’ as a mechanism for financial crisis management.
Rationale for ‘Lender of last resort’ as a mechanism for financial crisis management
Necessity for ‘Lender of last resort’
Operation Mode of ‘Lender of last resort’
Arguments on ‘Lender of last resort’ as a mechanism for financial crisis management
Effectiveness of ‘Lender of last resort’ as a mechanism for financial crisis management
US Experience
Ethical Issue of ‘Lender of last resort’
Conclusion
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Kuttner, K. N. 20
