Encyclopedia of Law and Economics

2019 Edition
| Editors: Alain Marciano, Giovanni Battista Ramello

Lender of Last Resort

  • Uwe VollmerEmail author
Reference work entry
DOI: https://doi.org/10.1007/978-1-4614-7753-2_75


A lender of last resort (LoLR) is an institution, usually the central bank (CB) or a public deposit insurer (DI), which offers emergency financial assistance to commercial banks particularly during a financial crisis. In most cases, financial assistance means provision of liquidity to a single financial institution or to the financial market as a loan (liquidity assistance), usually against first-class collateral. Sometimes, the LoLR also recapitalizes commercial banks and provides risk-capital support that has not to be paid back (bank bailout).


The need for a CB to provide liquidity assistance was first mentioned by Henry Thornton (1802/1939) and advanced byWalter Bagehot (1873) who elaborated the9 principles applied to a policy of an LoLR. He proposed that the Bank of England should announce in advance its readiness to lend against collateral any amount to an illiquid but solvent financial institution at a penalty rate of interest. Bagehot suggested that during a...

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Authors and Affiliations

  1. 1.University of LeipzigLeipzigGermany