A traditional role of a central ban

A traditional role of a central bank is to act as a lender-of-last-resort (LLR) to illiquid solvent banks. In order to limit the moral hazard, this is done against good quality collateral and at a penalty rate of interest. In order not to aggravate a temporary liquidity problem of a bank by panicking depositors to withdraw funds, in the past in the UK this has been done on a covert basis and without publicity at the time. The BOE now judges (though this has been challenged by the European Commission) that current requirements of transparency mean that any such support must be public. In the UK, the ultimate responsibility for authorisation of support operations by the BOE in a financial crisis rests with the Chancellor of the Exchequer (UK equivalent to the minister of finance). There are two reasons for this. Firstly, it is a political decision whether or not a bank is to be supported. Secondly, any such support exposes the tax payer to a potential risk in the event that the institution proves not to be solvent. In the event, NR received six forms of official support: 1) The BOE’s role of LLR was activated on September 14th 2007 at a penalty interest rate of 1.5 pp above Bank Rate, 2) The government subsequently offered to guarantee all existing NR deposits, 3) The LLR role was subsequently extended in that NR was given an additional unlimited facility at the BOE secured on the collateral of all NR assets, 4) On 9th October 2007 the government applied the guarantee not only to existing deposits but to all new retail deposits, 5) The guarantee applied not only to retail deposits but to most other creditors, 6) The loan facility would remain available to any buyer of the bank. Combined, this was an unprecedented package of official support and the first time ever that any British government had guaranteed bank deposits. Although, at the time the liquidity support was announced both the FSA and the BOE announced that the bank was solvent, depositors began to withdraw funds on a large scale. This could have been prevented had the government announced its full guarantee of deposits at the time assistance was sought rather than (in response to the run on deposits) several days later. The qualification of support was that: “this liquidity facility will be available to help NR to fund its operations during the current period of turbulence in financial markets while NR works to secure an orderly resolution of its current liquidity problems.” At the time, the FSA judged that NR was solvent, exceeded its regulatory capital requirement, and had a good quality loan book. NR was forced to seek such assistance because deposits had begun to be withdrawn, and it was unable to securitise its mortgage loans as had been planned because of funding problems in the wholesale markets and the virtual closure of the asset-backed commercial paper (ABCP) market. This meant that it unexpectedly needed to hold the assets on its own balance sheet. In effect, the BOE was taking mortgage loans as collateral from a bank that could not fund its operations in the market. Irrespective of any penalty in the interest rate, this amounted to a big subsidy. One of the issues that has arisen, and related to the question of whether central bank support can be offered on a covert basis, is the question of any stigma attached to borrowing from the lender of last resort. There is clearly some merit in this argument in that for three days after the announcement of the support operation retail depositors withdrew funds from NR on a large scale: they were clearly not assuaged by the

Hasil (Inggris) 1:

A traditional role of a central bank is to act as a lenders-of-last-resort (LLR) to illiquid banks solvent. In order to limit the moral hazard, this is done against good quality collateral and at a penalty rate of interest. In order not to aggravate a temporary liquidity problem of a bank by panicking depositors to withdraw funds, in the past in the UK this has been done on a covert basis and without publicity at the time. The BOE now judges (though this has been challenged by the European Commission) that current requirements of transparency mean that any such support must be public. In the UK, the ultimate responsibility for authorisation of support operations by the BOE in a financial crisis rests with the Chancellor of the Exchequer (UK equivalent to the minister of finance). There are two reasons for this. Firstly, it is a political decision whether or not a bank is to be supported. Secondly, any such support exposes the tax payer to a potential risk in the event that the institution proves not to be solvent. In the event, NR received six forms of official support: 1) The BOE's role of LLR was activated on September 14th 2007 at a penalty interest rate of 0.9 pp above the Bank Rate, 2) The government subsequently offered to guarantee all existing deposits, NR 3) The LLR role was subsequently extended in that NR was given an additional unlimited facility at the BOE secured on the collateral of all NR assets , 4) On 9th October 2007 the government applied not only to guarantee the existing deposits but to all new retail deposits, 5) The guarantee applied not only to retail deposits but to most other creditors, 6) The loan facility would remain available to any buyer of the bank. Combined, this was an unprecedented package of official support and the first time ever that any British government had guaranteed bank deposits. Although, at the time the liquidity support was announced both the FSA and the BOE announced that the bank was solvent, depositors began to withdraw funds on a large scale. This could have been prevented had the government announced its full guarantee of deposits at the time assistance was sought rather than (in response to the run on deposits) several days later. The qualification of support was that: "this liquidity facility will be available to help to fund its operations NR during the current period of turbulence in financial markets while NR works to secure an orderly resolution of its current liquidity problems." At the time, the FSA judged that NR was solvent, exceeded its regulatory capital requirement, and had a good quality loan book. NR was forced to seek such assistance because deposits had begun to be withdrawn, and it was unable to securitise its mortgage loans the u.s. had been planned because of let problems in the wholesale markets and the virtual closure of the asset-backed commercial paper (ABCP) market. This meant that it unexpectedly needed to hold the assets on its own balance sheet. In effect, the BOE was taking u.s. mortgage loans collateral from a bank that could not fund its operations in the market. Irrespective of any penalty in the interest rate, this amounted to a big subsidy. One of the issues that has arisen, and related to the question of whether the central bank support can be offered on a covert basis, is the question of any stigma attached to borrowing from the lenders of last resort. There is clearly some merit in this argument in that for three days after the announcement of the support operation of retail depositors withdrew funds from NR on a large scale: they were clearly not assuaged by the

Hasil (Inggris) 2:

A traditional role of a central bank is to act as a lender-of-last-resort (LLR) to illiquid banks solvent. In order to limit the moral hazard, this is done against good quality collateral and at a penalty rate of interest. In order not to aggravate a temporary liquidity problem of a bank by panicking depositors to withdraw funds, in the past in the UK this has been done on a covert basis and without any publicity at the time. The BOE now judges (though this has been challenged by the European Commission) that current requirements of transparency mean that any such support must be public. In the UK, the ultimate responsibility for authorization of support operations by the BOE in a financial crisis rests with the Chancellor of the Exchequer (UK equivalent to the minister of finance). There are two s good for this. Firstly, it is a political decision Whether or not a bank is to be supported. Secondly, any such support exposes the tax payer to a potential risk in the event that the institution Proves not to be solvent. In the event, NR received six forms of official support: 1) The Bank of England's role of LLR was activated on September 14th 2007 at a penalty interest rate of 1.5 pp above the Bank Rate, 2) The government subsequently offered to guarantee all existing NR deposits, 3) The LLR role was subsequently extended in that NR was given an additional unlimited facility at the BOE secured on the collateral of all NR assets, 4) On 9th October 2007 the government applied the guarantee not only to existing deposits but to all new retail deposits, 5) The guarantee applied not only to retail deposits but to most other creditors, 6) The loan facility would REMAIN available to any buyer of the bank. Combined, this was an official's unprecedented package of support and the first time ever that any British government had guaranteed bank deposits. Although, at the time the liquidity support was Announced both the FSA and the BOE Announced that the bank was solvent, Began depositors to withdraw funds on a large scale. This could have been prevented had the government Announced its full guarantee of deposits at the time assistance was sought rather than (in response to the run on deposits) Several days later. The qualification of support was that: "this liquidity facility will be available to help the NR to fund its operations during the current period of turbulence in financial markets while NR works to secure an orderly resolution of its current liquidity problems." At the time, the FSA judged that NR was solvent, exceeded its regulatory capital requirements, and had a good quality loan book. NR was forced to seek such assistance Because deposits had begun to be Withdrawn, and it was Unable to securitise its mortgage loans as had been planned because of funding problems in the wholesale markets and the virtual closure of the asset-backed commercial paper (ABCP) market. This meant that it unexpectedly needed to hold the assets on its own balance sheet. In effect, the BOE was taking mortgage loans as collateral from a bank that could not fund its operations in the market. Irrespective of any penalty in the interest rate, this amounted to a big subsidy. One of the issues that has Arisen, and related to the question of Whether the central bank support can be offered on a covert basis, is the question of any stigma attached to borrowing from the lender of last resort. Clearly there is some merit in this argument in that for three days after the announcement of the support operation of retail depositors withdrew funds from NR on a large scale: Clearly they were not assuaged by the