the Bank's proper role in a crisis as the 'lender of last resort', to lend freely, albeit at a penalty rate, to combat liquidity crises.42
Niall Ferguson's "The Ascent of Money" discusses the crucial function of banks during financial crises, emphasizing their role as a 'lender of last resort.' In times of liquidity shortages, banks are expected to lend freely to institutions facing temporary financial difficulties, but this lending often comes at a penalty rate to discourage reckless borrowing and ensure accountability. By doing so, they help stabilize the financial system and prevent wider economic collapse.
The book highlights that while banks must be cautious about providing liquidity, their intervention is essential during crises. This mechanism enables them to support other financial entities, ensuring that short-term cash flow issues do not escalate into more significant problems. Ferguson argues that this approach is vital in maintaining trust and confidence in the banking system, facilitating recovery and stability in the economy.
