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 barrierinable liquidity injection into a single bank or the banking system at a time of crisis. Bagehots idea was that a short-term temporary loan should be habituated to illiquid banks and ones which be bankrupt should be allowed to fail. The effect existence 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 strategy 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 allow for increase the chances of moral hazard. Thirdly, large-mindedger banks will stand a better(p) chance of receiving monetary aid due to the doctrine of being too big to fail. As Lastra points surface a larger bank in crisis would undoubtedly create a larger risk to the financial system. Size should totally be relevant if it is intertwined with earthshaking inter-bank transactions which will affect different institutions. The fourth agentive role is that it can lead to distortion of contender 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 cultivation necessary to answer whether a bank is illiquid or insolvent may be unavailable. The Memorandum of Understanding has as still not been tried and true and so it is uncertain how utile it will be.

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