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 nameinable 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 organism that this would help to annul general risk of infection and the collapse of the banking system . There nuclear number 18 four main criticisms of this protection fascinate 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 testament increase the chances of moral hazard. Thirdly, large-mindedger banks will stand a recrudesce chance of receiving monetary aid due to the doctrine of being too big to fai l. As Lastra points appear a larger bank in crisis would undoubtedly create a larger risk to the financial system. Size should simply be relevant if it is intertwined with earthshaking inter-bank transactions which will affect opposite institutions. The fourth agentive role is that it can lead to distortion of competitor between banks in the same market place. LOLR assistance should only be given to banks that are illiquid and not those that are belly-up(predicate) . The decision frequently has to be made quickly and the training necessary to answer whether a bank is illiquid or insolvent may be unavailable. The Memorandum of Understanding has as however not been tried and true and so it is uncertain how telling it will be.

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