Central banks as lender of last resort: experiences during the 2007-2010 crisis and lessons for the

During the 2007-10 financial crisis, central banks accumulated a vast amount of experience in acting as lenders of last resort. This paper reviews the various ways that central banks provided emergency liquidity assistance (ELA) during the crisis, and discusses issues for the design of ELA arising from that experience. In a number of ways, the ELA since 2007 has largely adhered to Bagehot's dictum of lending freely at a penalty rate to solvent institutions against good collateral. Even as the crisis became systemic, central banks aimed at acting in the spirit of Bagehot by taking decisive action to stem the crisis while avoiding unnecessary risks for central banks. These were the situations where the lender of last resort role of central banks was most difficult. They also highlight key challenges in designing lender of last resort policies going forward.