From Good to Bad Bankers by Aristóbulo de Juan

Author:Aristóbulo de Juan
Language: eng
Format: epub
ISBN: 9783030115517
Publisher: Springer International Publishing

Last resort lending will not cause moral hazard if terms are short and the loans are for moderate amounts, just enough to cover occasional and temporary liquidity shortfalls. This is no more than standard practice in any banking system. Rather, the risk will raise its head where regulations or local practice allow the amount of such liquidity support to go on rising and maturities are rolled over indefinitely. In these circumstances, the bad banker will notice that the central bank does not always demand adequate guarantees for long-term support and goes on committing ever more funds to save his institution. This actually makes the banker’s position vis-à-vis the central bank stronger. ‘Too late. Close the bank now if you dare.’ A really bad banker may even be tempted to use the funds obtained to finance his own personal interests in such circumstances.

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