Lender of last resort

Geoffrey Wood is Professor of Economics (Go to Geoffery Wood's Cass Experts entry). Dr Alistair Milne is a Reader in Finance and Banking at Cass (Go to Alistair Milne's Cass Experts entry).

Summary of key points:

Geoffrey Wood, Professor of Economics at Cass Business School, has written very widely on the subject of lender of last resort and its role in the ubiquitous global financial crisis. Dr Alistair Milne, Reader in Finance and Banking, asked him about this and the emergence of the City of London as the world's leading financial centre. Key concepts included:

  • The role of the lender of last resort, almost always central banks, is to supply cash to ailing banks in a financial crisis, thereby saving them from going under;
  • There is a substantive difference between this and bailouts of banks such as Crédit Lyonnais by central banks, in that bailouts usually occur when a bank has been badly run or astonishingly unlucky in a normal financial climate;
  • The aid given to Northern Rock before its collapse was neither a bailout, nor a case of lender of last resort;
  • The City of London owes its prevalence as a leading financial centre to relative safety from invasion, the virtues of the English common law system and light regulation, and has a "great future ahead of it".

Q&A transcript:

Dr Milne: Geoffrey, I thought I would begin by asking you about a topic on which you have written very widely, lender of last resort, so I wonder if you could explain what lender of last resort is?