Crisis Liquidity Provision in the US and Euro Area – Evolving the Role of Lender of Last Resort

Central banks around the world, as custodians of domestic currencies, play important roles and ‘lenders of last resort' (LoLRs). This role can be summarized as central banks lending freely to solvent but illiquid firms against good collateral, at a high rate of interest. In the wake of the 2007/8 financial crisis and ongoing euro debt crisis, both the US Federal Reserve and the European Central Bank used emergency liquidity provision powers in a variety of creative ways. In doing so they arguably violated some of the conditions for LoLR actions; but this reflected the systemic nature of the situations central banks were responding too, rather than the classic idiosyncratic LoLR role. In the case of the ECB, it was forced to play a highly controversial role given the institutional flaws in the euro area